The general suspicion that something just ain’t right with the economy has become an obvious reality. Hope and optimism that somehow things will muddle along, or improve, are fading. You can see it, feel it, and even smell it.
For example, several new data points were revealed Friday. Each offered further confirmation that the economy’s not progressing. Rather, it’s regressing.
According to the Bureau of Labor Statistics, producer prices dropped 0.4 percent last month and 1.6 percent on an annualized basis. Naturally, wholesale prices go down when the dollar goes up. They also go down when there’s weakening demand.
One would think that a strong dollar would encourage greater demand in the U.S. for imported goods. Yet that’s not what’s happening at all. “For the first time in at least a decade,” reports the Wall Street Journal, “imports fell in both September and October at each of the three busiest U.S. seaports.”
Reduced demand for doodads from China and other exporters likely translates into weaker U.S. retail sales. Currently, this appears to be happening. For according to the Commerce Department, retail sales rose just one tenth of one percent in October. What to make of it?
Gasping for Air
The consumer, if you recall, accounts for 70 percent of the U.S. economy. Of this, retail sales account for about a third of consumer spending. Services make up the other two thirds.
Slow-moving retail spending may mean there’s higher service spending. From what we gather, nominal dollars spent on services year to date have been at 67.5 percent of total consumption, which is up from 66.6 percent for the same period in 2014. Hence, the mighty consumer could still be driving the economy forward.
The real effect of this spending differential will be unclear until fourth quarter GDP is reported. What is clear is that Wall Street, that forward looking animal, thinks retail’s gasping for air. Walmart shares are down approximately 32 percent year to date. Target, on the other hand, is down just about 4.7 percent. But since mid-July it is down about 15 percent.
Walmart and Target will report third quarter earnings on Tuesday and Wednesday, respectively. Wall Street analysts are expecting a decline in quarterly revenues for both of these stores. So, perhaps, weak revenues are already priced into these stocks. To what extent, we shall soon find out.
Some of the higher end retailers are having a rough go of it too. Macy’s, for example, is down over 41 percent year to date. Nordstrom’s is down over 26 percent so far this year.
The Next Frauds to Come Down the Turnpike
In other words, many retail stocks are already in a bear market; they are down 20 percent or more. Likewise, those that aren’t already in a bear market soon will be. The year-end Black Friday earnings boost may end up being a year-end bust.
“According to a survey done by retail research firm Conlumino,” reports CNN Money, “45 percent of shoppers said they planned to spend less on Black Friday this year than last year. Another 24 percent said they would spend about the same amount while only 18 percent said they would spend more. The remaining 13 percent sat out Black Friday last year and said they would do so again this year.”
Declining wholesale prices and weak holiday demand could portend a deflating economy. Of course, price deflation is not what the Fed wants. The Fed wants price inflation.
Specifically, the Fed wants consistent 2 percent inflation to encourage consumption, grease the economy, and perpetually lighten the burden of debt. Yet, where an economy’s concerned, things hardly work out the way the planners want. Instead of price inflation the Fed may get the opposite. Deflation is what they fear most.
When the economy deflates, a self-reinforcing cycle develops. Prices rapidly decline but so does spending, which accelerates personal, business, and government bankruptcies. As businesses fail the unemployment rate skyrockets.
Following the Great Recession the Fed executed extraordinarily radical monetary policies to levitate prices. These policies, which we are experiencing the ramifications of today, resulted in high asset prices and a stunted economy. Given the nearly $4 trillion in debt monetization that occurred, the Fed will probably up their ante to combat the next deflationary scare.
Negative interest rates, where banks charge you a fee for holding your money, and QE for the people, where the Fed creates money from nothing and sends checks to everyone, are the next likely frauds to come down the turnpike.
Prepare now for the massive pileup that will surely follow.
[MN Gordon (send him email) is the editor of the Economic Prism. Visit Economic Prism. The Economic Prism is published by Direct Expressions LLC. Subscribe Today to the Economic Prism E-Newsletter at http://www.economicprismletter.com]