The soft-landing narrative that has started to make a comeback in recent weeks does not make sense. The damage is done. The economic slowing will continue. The global economy is a slow-motion car crash in the making with the U.S., Western Europe and China all suffering the consequences of radical fiscal spending policy combined with historically accommodative monetary policy.
The economic damage is done even if price increases were to flatline tomorrow. We have had elevated prices as measured by the year-over-year percentage change in the CPI since April of 2021 (4.2%). The year-over-year percentage increase in headline CPI was 7% for the month of December 2021 and we will likely have headline CPI of approximately 7% for December 2022. This is the most price appreciation we have had in 40 years. The damage to the consumer is done. Even if month-to-month and year-over-year inflation were to flatline tomorrow the consumer would have absorbed two consecutive years of near double-digit CPI increases (well into double-digit percentage territory when you consider that some of the largest spending categories such as Food and Shelter have in fact experienced real-world price increases that are much higher than what is published by the Government’s CPI calculations).
The consumer is in a tough spot that will further deteriorate. Consumer credit spending has not increased because the consumer is strong. On the contrary. Consumer credit spending is up and savings are down because the consumer is trying to make ends meet.
We see this in auto loan delinquencies for example where the number of loans that are delinquent by 60-days or more are up 26% year-over-year. The subprime severe delinquency rate is the highest it has been since 2006. Higher rates, higher credit spending and higher prices have the consumer caught between a rock and a hard place.
Add mounting job losses, lower home prices and lower retirement funds to the mix and it is clear that consumers’ financial conditions are deteriorating. This does not bode well for the economy heading into 2023.
Real GDP is overstated. Last, I don’t buy the reported Real GDP figure for Q3. My view is that Nominal GDP is deflated by a number that does not fully remove the effect of price increases. I believe that unit sales and therefore Real GDP was down year-over-year in Q3 and that all “growth” was due to price increases. Using food as an example, our at home food bill was up approximately 30% in 2021 and approximately 40% in 2022. My food consumption consists largely of staples, nothing exotic. My experience is not uncommon and speaks to how the Federal Government under-reports price increases, which makes sense given that it is their inflation-inducing fiscal and monetary policies that are the root of the economic problems we suffer today. Real world shelter price increases similarly far outpace the anemic price increases that Federal Reserve surveys capture with a delay.
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