Late May/Early June Economic Outlook

The major causes of our current inflation-driven crisis are the roughly $6 trillion in largely excessive spending the Trump and Biden Administrations spent in the name of COVID relief and economic recovery; President Biden’s reregulation of the U.S. economy; and the dramatic expansion of the U.S. Federal Reserve Bank’s balance sheet from $4.14 trillion (January 2020) to about $9 trillion (May 2022). 

U.S. fiscal, monetary and regulatory policies since early 2020 are the primary cause for a pending recession over the next 12 to 18 months.

Many in Washington have argued that inflation is a global phenomenon and Biden’s policies are not responsible for the high inflation levels in the United States. Including the rest of the world, the Biden Administration claims U.S. inflation is largely due to supply chain issues and the war in Ukraine.  We disagree.

A recently-released study from the Organization for Economic Cooperation and Development (OECD) shows U.S. inflation at the end of March 2021 at 2.6% and 8.5% at the end of March 2022. Over the same period, most of the largest European economies — countries much more directly impacted by the war in Ukraine — showed substantially lower rates of inflation. We believe differences in inflation rates can be attributed to less government intervention among our European allies over the same period. Consider the following: Inflation in the United Kingdom was 1% at the end of March 2021 and 6.2% at the end of March 2022; Switzerland had inflation of -0.2% at the end of March 2021 and 2.4% at the end of March 2022; Sweden had inflation of 1.7% at the end of March 2021 and 6.0% at the end of March 2022; Italy had inflation of 0.8% in March 2021 and 6.5% in March 2022;  Germany had inflation  of 1.7% in March 2021 and 7.3% in March 2022; and France had inflation of  1.1% in March 2021 and 4.5% in March 2022. The same holds true with other global economic powers, like South Korea, whose inflation was 1.9% at the end of March 2021 and 4.1% at the end of March 2022; and Japan, which had inflation of -0.4% in March 2021 and 1.2% in March 2022. Finally, Canada experienced inflation of 2.2% in March 2021 and 6.7% in March 2022. 

In the case of the above-mentioned economies or other OECD countries with inflation rates close to ours or higher, a strong correlation between inflation and excessive monetary, fiscal and/or regulatory policy exists — similar to what took place in the United States over the same period.

Current Issues

For months, we have been discussing the growing number of economic signals that a recession will be part of the U.S. economic landscape sometime between Q2 2022 and the end of 2023 at the latest. In addition to our previous discussions on inverted yield curves, the rule of 4%, falling used car prices and tracking quarterly U.S. GDP, the following indicators add fuel to the argument for a pending recession.

1. Stock market parallels and the Great Depression

On May 20, 2022, the Dow Jones Industrial Average (DJIA) experienced its eighth straight week of decline – not seen since 1932. In fact, the Dow Jones Industrial average has been volatile throughout President Biden’s administration (30,930.52 on Inauguration Day; an all-time closing high of 36,799.65 on Jan. 4, 2022; 31,253 on May 20, 2022; and, just under 31,393 on June 10).

2. The National Federation for Independent Business (NFIB)

The NFIB, tracks quarterly small business economic trends (since 1973) and conducts monthly surveys (since 1986). Its latest survey data released on April 12 reflects an all-time record low for business confidence. 

3. The University of Michigan Consumer Sentiments Index

The University of Michigan’s Consumer Sentiments Index, perhaps the most respected tool for tracking consumer confidence, was down 14% from May in its preliminary June release last week. The June preliminary report came in at 50.2, down 8.2 from May, registering its lowest recorded value since the recession of 1980.

4. Most recent CNBC’s CFO Council survey results

In a recent CNBC survey of top corporate chief financial officers (CFOs), the consensus is for the Dow Jones Industrial Average to decline 18% from its 2022 high to roughly 30,000 before it can realize a sustainable rebound. Every CFO in the survey believes a U.S. recession can’t be avoided, with 68% predicting a recession by the end of the first half of 2023, while the remaining 32% believe a recession will occur by the end of 2023 or sooner. 

5. The S&P 500 has declined more than 20% since January 2022.

The investment research firm CFRA found that S&P 500 bear markets on average begin seven months before the start of a recession. A bear market is defined as a decline of 20% or more in a broad-based stock market like the S&P 500. This correlation has resulted in recession nine out of the 12 times it has occurred since 1948. If the data holds true for the 10th time since 1948, a recession can be expected in early August, seven months from the S&P 500’s all-time high in January 2022.

Unfortunately, the tell-tale signs of a recession continue to grow.

Conclusion

Recently-released U.S. CPI and PPI data indicate that inflation is not under control and the Federal Reserve will need to take continued strong action similar to its June decision if it is to tame inflation. However, we do not believe our current Federal Reserve Board has the policy knowledge, courage and time to reduce inflation while navigating a soft landing and avoiding a recession.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at tgnash@northwood.edu.  The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. This month’s publication was co-authored by McNair student scholar Brad Getchel. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, visit:  www.northwood.edu/media/publications/. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

Can money measure love … at least on Mother’s Day?

This year, Americans celebrated the 116th Mother’s Day on May 8.  Even though some believe Mother’s Day has become too commercialized, Americans continue to spend billions of dollars on their moms. From a simple gift or cooking dinner at home for Mom, to an ornate bouquet of flowers and dinner at a special restaurant, Mother’s Day is a special event in America — a time to honor moms as well as to stimulate the U.S. economy.

A few days after our most recent Mother’s Day, Antenna TV aired a re-run of “The Tonight Show Starring Johnny Carson” from May 1986 in which Johnny was reading from newspapers about expected spending on the celebration of the upcoming Mother’s Day. In the segment, Carson noted Americans were expected to add $6.5 billion to the U.S. economy through gifts ranging from chocolates and flowers to elaborate dinners at fancy restaurants and even a “re-roofing” package offered as a Mother’s Day gift through Sears & Roebuck.

This rerun of “The Tonight Show” got us to think about how much Americans spent on Mother’s Day this year; what they spent their money on; and whether spending has increased or decreased since 1986.

With the current level of inflation Americans are facing, coupled with a negative 1.4% first-quarter U.S. GDP, preliminary estimates are Americans spent $31.7 billion celebrating Mother’s Day this year on a wide variety of gifts. In a survey conducted by retailmenot.com, Americans listed the following items as the top purchases for some or all of their Mother’s Day dollars: flowers (47%), chocolates (36%), gift cards (29%), dining (26%), jewelry (22%) and beauty products (19%).

In fact, if Mother's Day was a U.S. publicly traded company, the estimated $31.7 billion spent this year on our moms would have made it the 99th largest company by sales on the 2021 Fortune 500 list of U.S. publicly traded corporations by sales, just two spots in front of Tesla. Also, it would have been the 389th largest publicly traded corporation by sales on the global list of Fortune 500 companies.

In addition, if the $31.7 billion Americans spent on their mothers for Mother's Day were a free and independent countries’ GDP, Mother's Day as a country would be the 101st largest economy in the world in 2022; larger than well-known countries such as Iceland and Jamaica.

Next in our study, we adjusted for population (which was 333.3 million in 2022 and 240.1 million in 1986); the number of mothers (89 million in 2022 and 66 million in 1986); and inflation (it takes $2.62 2022 U.S. dollars to equal one 1986 dollar). We found the $98 Americans spent per mother on Mother’s Day in 1986 is the equivalent of $256.76 per mother in 2022 dollars, while Americans on average spent $356.78 per mother this year.

During these challenging and turbulent times, when precious dollars are more carefully allocated than they are usually, Americans spent, adjusted for inflation, 39% more on their mothers on Mother’s Day 2022 than in 1986. Whether the best we could do was a simple “I Love You” note on a piece of paper or a more extravagant gift, there is no doubt Americans love their mothers (and rightfully so!). And if money spent on Mother’s Day is a measuring tool, perhaps we love our mothers these days just a little bit more than we did in 1986. 

One final note: the data shows average daily call volume is up 31% on Mother’s Day. Did you remember to call your mother?

About the authors:

Dr. Timothy G. Nash is the director of the McNair Center at Northwood University.

The Honorable Lisa C. McClain is a member of the United States Congress from the 10th District of Michigan.

Mr. James Hop is a McNair Scholar and chair of the Entrepreneurship Department at Northwood University.

For Whom Inflation Tolls…It Tolls for Thee

In a Sept. 1, 1935, article entitled Notes on the Next War published in Esquire magazine, American literary icon Ernest Hemingway wrote:

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

Considered a socialist politically, the above quote shows promise – leads us wishing Hemingway’s writings explored economics in greater depth and/or he had lived long enough for us to have invited him to dinner.

Renown economist Milton Friedman likely would have found agreement with Hemingway’s quote. Friedman believed inflation occurs when government increases the money supply at a more rapid pace than the production of goods and services. Inflation is a government policy used to pay off debts by debasing a nation’s currency and financing government activity through the excess printing of money, often to avoid unpopular higher taxes.  The initial result of inflation is usually higher prices and the illusion an economy is growing, doing well, and consumers are demanding more of most of the goods and services said economy is producing. This is false. With inflation, governments finance economic activity through the creation of money while the resulting higher prices to a largely ignorant electorate are often blamed on greedy businesspeople rather than bad government policy, while government, business and consumers are all worse off as a result. 

Impact of Inflation

Over the past year, we have warned of a recession in 2022 or 2023 based on key signals from inverted yield curves, the rule of 4% and declining monthly used car prices; all followed by a slowing U.S. economy. 

The following is a list of 10 reasons why all Americans, especially our political leaders in Washington, should be concerned regarding the potential for a coming inflation-driven recession, exacerbated by the COVID-19 pandemic and war in Ukraine.  

1. The U.S. Consumer Inflation rate as of early May 2022 stands at 8.5% due to excessive government spending and expansionary Federal Reserve monetary policy: a) The U.S. inflation rate was 1.4% when President Biden took office; b) his COVID Relief bill injected an additional $1.9 trillion into the economy in March 2021, contributing to a 2.6% inflation rate; c) His unbudgeted $1 trillion for infrastructure last November, helped push inflation to 6.8%.

2. President Biden entered office facing a record high Federal Reserve Balance Sheet of $7.4 trillion. As of early May 2022, the number is now $9 trillion with the Federal Reserve Bank pledging to buy even more government securities for at least another month.

3. The monthly inflation rate for March 2022 is 1.2% or looking forward on an annualized basis would be an inflation rate of 14.4% if the FED does not act quickly to bring inflation under control.

4. March producer or wholesale inflation on a year-to-year basis was 11.2%. Producer or wholesale prices generally signal what future consumer inflation will be like as producers try to stay as profitable as possible by attempting to pass higher costs on to consumers. The producer price index for March 2022 was 1.4% or would be 16.8% in a year if annualized.

5. The U.S. National Debt has been out of control since the 1990’s, incredibly it has increased 41.44% since 2019, and stands at $30.433 trillion today due to excessive government spending by both parties. 

6. Total non-farm U.S. payrolls stood at 152.5 million Americans employed in February 2020, a pre-pandemic record. Today, with a strong job market, and an estimated 11.55 million job openings yet to be filled, we still have 1.2 million fewer Americans employed in May 2022 than in February 2020. This is largely due to the continued restructuring of the economy from the pandemic era as well as inflation and declining real wages.

7. President Trump’s tax cuts and zeal for deregulating the U.S. economy helped spur solid economic growth from 2017 through early 2020. President Biden’s re-regulation of the economy, especially in the area of energy regulations and his numerous threats to increase taxes on corporations and the wealthy, is in our opinion hampering economic growth.

8. China politics and the pandemic in Asia are still affecting the global supply chain and driving up overall consumer prices by as much as 3%. Russia’s invasion of Ukraine has negatively impacted the global supply of oil as well as corn and wheat from Ukraine. However, excessive U.S. government spending and monetary policy remains the root cause of inflation, driving up prices, interest rates and U.S. Treasury Bond Yields.

9.      Dr. Kevin Hassett, former Trump chair of the council of economic advisors and current Hoover Institution scholar recently stated: “since 1950, there is a 95% chance an economy will go into recession within a year after having such a dramatic decline in Q1 GDP as we have experienced this year.” 

10.  At the end of April, we were producing 11.9 million barrels of oil a day vs. the daily average of 13.2 million barrels under the Trump Administration. We must deregulate the U.S. petroleum industry. The price for regular gasoline is currently $4.28/gallon and would come down substantially if we were producing 1.3 million additional barrels of oil daily.

Conclusion

Since our current inflationary spiral began in January of 2021, nominal wages are up 5.5%, while overall real wages are down 3%. In addition, investors have lost an estimated $20 trillion in wealth due to losses in stock portfolios and 401K’s. Reduced purchasing power, a negative wealth effect from investments and savings, and lower consumer confidence in the future is a troika of bad news which must be reversed. 

About the Authors

Dr. Timothy G. Nash is director of the McNair Center at Northwood University. Mr. John Hantz is CEO of The Hantz Group in Southfield, Michigan.

April 2022 Economic Outlook

March / Early April 2022

 

Introduction

Milton Friedman argued, "inflation is always and everywhere a monetary phenomenon that is produced only by a more rapid increase in the quantity of money than output (goods, services, and/or assets).”

Key March / Early April Data

Positive and Negative Signs

The Standard and Poor’s 500, Dow Jones Industrial Average and NASDAQ have all finished down since April 1, while West Texas Intermediate Crude was down in mid-April from its March high, trading at 106.54. The 10-Year Treasury Bond Yield closed Friday at almost 2.83%, a near 3-year high, with the 30-year fixed home mortgage interest rate closing at 5% for March, up roughly 60% since the beginning of the year. Finally, the University of Michigan’s Consumer Sentiment Survey was up slightly in March, but still dramatically below its all-time high.

Current Issues

 

Milton Friedman was awarded the Nobel Prize in Economics in 1976 for his path-breaking work on monetary policy, inflation, and the business cycle. Dr. Friedman established a strong correlation between erratic and excessive government monetary policy, its over-stimulation of the economy and the subsequent recessions or depressions that have followed in the United States.

Current U.S. monetary policy has taken consumer price inflation from 1.4% on an annualized basis in January 2021 when President Biden was elected to 8.5% on an annualized basis at the end of March 2022.  If you extrapolate the March monthly consumer inflation rate of 1.2% over 12 months, the yearly inflation rate would be 14.4%.  Historically, inflation rates at this level have only

 

 

been brought under control by economic recession or depression. 

Excessive inflation plus the following three indicators lead us to believe a recession is on the horizon for the U.S. economy over the next 12 to 18 months.

1.     Inverted Yield Curve

An inverted yield curve has been a precursor for each recession since 1955, with only one exception to that rule. The two-year treasury rate of 2.337% inverted to the 10-year treasury rate of 2.331% on April 1, 2022. This last happened in 2019 and then the U.S. entered a recession in 2020. The five-year treasury rate of 2.56% inverted to the 30-year treasury rate of 2.55% on March 28, 2022. This inversion last happened in 2006. The FED is ramping up short-term interest rates to curb rampaging inflation, which stood at 8.5% at the end of March 2022. A major factor to watch is the impact of higher short-term rates on bank lending and consumer borrowing. This double-edged sword could push the country toward a recession as banks pull back from lending due to lower yields on loans while pushing up short-term rates for consumers who need to use more of their discretionary income on debt service.

2.     The “Rule of 4%”

Noted Neo-Keynesian economist and former U. S. Treasury Secretary Larry Summers has been one of the few well-known economists friendly to the Biden Administration that has argued for more than a year that inflation is non-transitory and is the creation of excessive government spending and expansionary monetary policy. Summers’ research has also pointed out that 100% of the time since the end of World War II, when the U.S. Consumer Inflation Rate rises above 4% and the U. S. unemployment rate falls below 4%, the over-stimulation of the U. S. economy has been the result as well as a recession within two years. The “Rule of 4%” recently took place when the U.S. unemployment rate dipped below 4% in December 2021 with inflation above 4% simultaneously. 

 

3. Used Car Prices as a leading indicator of recession

Former U.S. Federal Reserve Chairman Alan Greenspan used to argue falling general U.S. used car prices would directly or shortly thereafter be accompanied by reduced sales of used cars. He noted this correlation would occur during high inflationary periods when inflation increased faster than wages, resulting in a decline in real incomes. When this occurs, consumers have reduced purchasing power and are worse off economically. The result is the slowing economy and eventually a recession or depression. Prior to March, U.S. used car prices were up roughly 40% on an annualized basis. However, in March 2022, used car prices were down 3.8%, according to the U.S. Bureau of Labor Statistics, while sales of used cars less than 10 years old were down 27% compared to March 2021. Buyers of used cars are now taking 171 days to shop compared with 89 days in March 2021. The recent Fed policy change to raising interest rates will have multiple impacts on the economy. Rising interest rates should slow down the economy as the cost of financing homes and automobiles and other large ticket items will be more costly. This is evident as noted in the slowing of used car sales and the sharp increase in mortgage rates from below 3% for 30-year mortgages to touching 5% in mid-April. 

Conclusion

 

In addition to the above-noted data, the U.S. Producer Price Index (PPI) for March registered its highest level in its 12-year history at 11.2% (trailing 12-month growth), with a forward-looking annualized rate of 16.8%. The previous data is exacerbated by the fact that the Federal Reserve GDP Now estimator produced by the Atlanta Federal Reserve Bank is calling for a GDP growth rate of only 1.1% for the U.S. economy in the first quarter of 2022, which is much more optimistic than Goldman Sachs, which is calling for only 0.5% growth in Q1 2022. Former Trump Administration Chair of the President’s Council of Economic Advisors Dr. Kevin Hassett, using a similar analysis to Alan Greenspan’s on declining new and used car sales in March, believes the U.S. economy may

 

already be in recession or certainly heading in that direction. Finally, we are holding to our earlier prediction that there is a 60% chance the U.S. economy will be in recession by the end of the summer of 2023, if not sooner.

Contact Us

Comments or questions should be directed to Dr. Timothy G. Nash at tgnash@northwood.edu. The NU Outlook is a monthly publication of The McNair Center for the Advancement of Free Enterprise and Entrepreneurship at Northwood University. This month’s publication was co-authored by Nash and McNair Center Scholar Professor James Hop. To view Northwood University’s Monthly Economic Outlook Newsletters from previous months, visit http://www.northwood.edu/media/publications/. For more information about Northwood University, our academic programs and enrollment opportunities for students, visit www.northwood.edu.

 


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