By John Galt
April 11, 2011
The myth that the American consumer is back being perpetuated by the financial infomercial networks and our government is about to be shattered once again. The proclamations by Fed governors that we the people are participating more in the economic engine ignores the declines in compensation compared to inflation since 2002 when the Fed and U.S. government elected to inflate the system at all costs rather than face a necessary recession to flush the system. This policy continued unabated throughout the last decade with compensation (as measured by the BEA) trailing the annual rate of inflation severely the majority of the time period:
The lag between compensation and actual inflation is not measured equally in my opinion as the impact in higher consumer prices, which is far greater than the hedonically adjusted fiction published by the government, destroys net disposable income which also impacts the proverbial “recovery” if it were to be measured by income grouping versus the net total earnings of all Americans. The middle and lower classes feel the crushing burden of increases in food and energy costs as as this chart below reflects, the BLS version of official food inflation is lagging behind energy dramatically, but will catch up soon enough:
Unless my readers do not eat, they realize the annualized rate of just over 2% change in food prices is total nonsense as food prices in many categories, especially those consumed weekly have increased anywhere form 12% to 33% in less than 3 months. This lag in the official CPI for foodstuffs will be more than compensated for soon enough as diesel prices have surpassed the warning point and are well on the way past $4.00 per gallon on the national average:
The margins in the transportation industry are already thin enough without this extra burden but it is the consumer who ultimately pays for this spike and as the graph above illustrates, last time we visited prices this high the economy cratered shortly thereafter. The warning signal to the economy is even better demonstrated by the huge lag in wages and salaries versus the national averages for diesel fuel and unleaded gas:
The quarterly rate of change in wages and salaries continues to indicate a flattening out if not outright decline per the BEA while one of the most expensive items which consumes the average citizen’s budget is skyrocketing back to the same levels witnessed in 2008. The lack of a recovery in wages and salaries plus the lack of substantive jobs growth, in other words high paying or quality positions being created as per previous recoveries indicates that this spike in energy costs will have a larger bite than previous super spikes. Odds are this will be the final straw which breaks the back of private industry and the consumer resulting in another economic crash this year similar if not worse than 2008.
If the Federal Reserve performs as expected and commits another blunder soon by tightening or refusing to commit to further Quantitative Easing, then the economy will not grind to a halt, it will slam into a wall much like it did in August of 2008. The comparisons to 1936-1937 will be unmistakable at that point in time.