Stagflation has been a buzzword here lately – side note, and I think buzzwords are for the birds, much like this topic. I believe that today's façade of stagflation will disappear shortly. Some economists have argued that we are currently witnessing it (over the short-term), given high unemployment, current demand, and persistent inflation. I'd argue against it. Let's dive in.
What is Stagflation? Stagflation is a challenging environment for a market to navigate – it combines three (3) market factors:
Stagnant consumer demand
Persistent inflation, and
Relatively high unemployment
Now, let's walk through these three components in today's context:
Stagnant Consumer Demand: Simply put, I don't believe that we have stagnant consumer demand. We are in a different environment, as most potential growth problems are not demand-driven, more so, supply-constrained – we have the latter. We don't have weak new orders. We don't have shrinking backlogs – we don't have an aggregate demand issue. We have a pandemic that seems to be "ending" related to the economy's ability to function correctly. That pandemic is causing significant supply-side disruptions in the context of solid demand. Robust demand means that we are not in a stagflationary environment.
Persistent Inflation: Right now, which will be music to John Luke's ears, we have persisting inflation. But the big question regarding this is – how much of this continues to be COVID-related? Suppose Delta is the last major wave that triggers restrictive economic measures (e.g. global factories and ports closing). In that case, we'd finally be officially entering "the new normal" (i.e., living with COVID in a post-vaccine, herd immunity, post-therapeutic world) – enhanced benefits expired, in-person schooling back, and the global leisure & hospitality open for business. Are we not heading into a world in 2022 where labor supply loosens, factories and ports stay open, and freight logistics decongest? Are those not some of the biggest problems companies are talking about today regarding inflation?
Relatively High Unemployment:
Yes, we do have a relatively high unemployment rate. But it is going down -- and was driven by specific policies (massive fiscal stimulus, max easy monetary policy, school closures, business closures/restrictions), in the context of a pandemic that presented inherent health concerns.
More importantly, when people talk about relatively high unemployment in a stagflation environment, they refer to a consumer wallet that is contracting and depressed (even though prices are rising). A toxic combination. But not the combination that exists today. The relatively high unemployment rate today is not because the consumer is struggling. Today's relatively high unemployment rate exists for the very opposite reason: the consumer wallet grew so substantially in 2020/2021 – due to policies in response to COVID – that the incentive to work at pre-COVID wage levels dropped dramatically. Look at the JOLTS numbers.
Furthermore, U.S. Households are very healthy. At 20% growth over the past year, net worth is growing at its fastest pace of the post-war era. $31 trillion has been added to household net worth in the past five quarters. Consumer balance sheets are well fortified, and this might be the most significant positive going for our economy.
Bring this all together – I do not believe that we are in a stagflationary environment. Could it be construed that we are in this environment given supply-chain issues? Absolutely. But, we have a consumer that has a fortified balance sheet, i.e., a very high net worth (Total Assets – Liabilities), coupled with substantial pent-up demand. If I were a betting man (and I am – my mortal lock for next week is Florida -3.5 against LSU), I would never bet against the propensity for the consumer to spend money - I would never bet against America. Remember, consumer spending accounts for 2/3rds of GDP – this may be the most significant positive for our economy moving forward into 2022.
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