The “Pareto Principle” or 80/20 Rule is a well established theory which can be applied many obvious sciences, or as in the case of economics, the structure and results of actions and inaction pushed forward. The definition of this principle is simple (via Investopedia):
The Pareto Principle is a concept that specifies that 80% of consequences come from 20% of the causes, asserting an unequal relationship between inputs and outputs. Named after economist Vilfredo Pareto, the Pareto Principle serves as a general reminder that the relationship between inputs and outputs is not balanced. The Pareto Principle is also known as the Pareto Rule or the 80/20 Rule.
A simpler application of this rule is to apply the idea that 80% of most citizenry is not aware, does not care, or abides by the decisions, inaction, rule, or stupidity of the other 20%. In economics, that theory seems sound and viable as the inputs of the 20% usually does have an outsized impact on the remaining 80%.
Until recently, that seemed like a fantastic methodology to measure and manage the massive United States economy.
Unfortunately for the consumer who walks into the grocery store, the majority of Americans are not part of the twenty percent so they do not get to enjoy the bubbles, the fruits of inflationary policies, nor do they believe the “data” as presented by America’s propagandist media; be it financial or mainstream.
The team at MacroEdge.net has been engaged in a project to provide accurate, timely, and alternate measures of information to provide the public with a snapshot of economic reality which might seem contrary to the “narrative” that markets and media present. This author simply participates as an observer and recorder of history, primarily from the middle class point of view. If one thinks that our nation is engaged in a booming economic expansion, the following data points might well be a strong contrarian argument that indeed 80% of the American population has been enduring a recession for several months now, perhaps longer.
I. The Inflation Myth
There is a persistent theme presented in the past 18 months that inflation is in check and that the real cost of goods rising is variable and does not impact that average consumer to the degree that CPI (Consumer Price Index) did during the 1970’s and early 1980’s. That is 100% nonsense.
The Atlanta Federal Reserve Bank has developed an alternate measure of “sticky” or persistent inflation known as Sticky CPI and that measure provides a much more accurate snapshot of reality for the consumer versus the politically influenced hedonic garbage produced by the Bureau of Labor Statistics every month or the the equally political BEA’s Personal Consumption Expenditure (PCE) index.
Unfortunately for workers, the rate of wage increases is not keeping pace.
Even worse for the average American, the cost of daily, weekly, and monthly goods and services is still far outpacing the increase in wages required to overtake the inflation rate.
The reality is reflected in an excellent paper produced by economists EJ Antoni and Dr. Peter St. Onge via the Brownstone Institute on October 9, 2024, where they stated quite accurately, in this author’s opinion, the following:
Moreover, these are all official numbers. When disposable personal income is deflated with a more accurate inflation metric (detailed below), the real increase of 12.9 percent in disposable income from the first quarter of 2019 through the second quarter of 2024 becomes a real decrease of 2.3 percent over that period – an aggregate 15% difference.
The chart below illustrates how the rapid increase in disposable personal income in 2020 and 2021 has subsequently been paid for through inflation in the two-and-a-half years thereafter.
As one can see, the inflationary impacts when adjusted for inflation and stagnant wages reflects a very different picture from the financial and mainstream media.
In fact, even the CEO of Walmart warns that grocery inflation will continue to impact the American public well into 2025, which will only worsen the situation:
Walmart CEO predicts grocery inflation will continue in early 2025
The excerpt below is the most key sentence is important to remember as the measures used by the Fed and American government fail to account for reality for the 80%:
Food-at-home prices have jumped 25% compared to before the COVID-19 pandemic, according to FMI – The Food Industry Association.
This is important when referring to the following data presented by The Kaplan Group, a collection agency, which reflects how the 80% are surviving via their fading credit lines and lifestyle:
If one notices the areas circled above, auto and credit card are the areas where inflation has most impacted the consumer, especially the middle and lower classes, and created a massive growth in consumer debt as Americans attempt to survive week to week on their lagging incomes.
From Fox Business:
More Americans living paycheck to paycheck than 5 years ago, Bank of America data shows
The key excerpt is critical to understanding the 80/20 concept:
Lower-income households have predictably been impacted the most, with 35% of those making less than $50,000 annually falling into that category, but every income bracket showed at least 20% have little left over after necessary spending, including those making more than $150,000.
The emphasis was added by this author, but one gets the point.
If one is to take a look at the report from the Federal Reserve regarding consumer credit delinquencies, the only conclusion is that America is on a 2008 trajectory which was a truly recessionary indicator:
In the mean time, the latest report from the New York Federal Reserve in the third quarter also indicates that those trying to keep up with their wealthier neighbors are running into financial difficulty as the ability to outpace inflation is fading rapidly.
To reach a point of 90 day plus delinquency means that the banks and the debtor have exhausted all avenues for refinancing or the ability to extend and pretend. The probability is that this will only get worse in the fourth quarter and well into 2025.
II. The Full Employment Mythology
The MacroEdge team has been attempting to provide data to warn everyone that the employment data using the traditional metrics might well be flawed when using it for macroeconomic analysis via the Federal government’s perspective. This paper shall attempt to add to this with a few graphs of this author’s favorite measures which are indicative of economic stress for the majority of the American public.
Alex Joosten on X provided a fascinating graph via FRED which is indicative of a middle and lower class recession already underway:
This is not a positive indicator for economic growth either in the rear view mirror or looking forward for the next 12 months. Another major indicator, as Anna Wong of the Bloomberg Economics team has been warning, as has this radio host, is the duration of unemployment also starting to expand.
Unfortunately for the Trump bulls and those that believe that our economy is infallible, this indicator has a pretty good track record of a recession underway since the 1970’s. For the 20% or even the 5%, that is not a relevant data point however.
Broken down by how many weeks even further, overlaid with the graph above, it looks even worse.
These consumers unemployed over 15 weeks and 27 weeks are not buying groceries, paying for insurance, making car payments, or going on vacation. They are barely surviving on their personal credit lines and in fact the reason delinquencies are rising.
III. Conclusion
There is only one conclusion using these two most basic of metrics in addition to data available when reviewed with an open mind. While the wealthiest 20% of America is continuing to enjoy a lifestyle that presents the view of an expanding economy, 80% of the public is barely getting by in this author’s opinion.
One only has to travel the country, listen to the travails of the middle class trying to make a house, car, and medical payments plus provide a decent standard of living in our nation today.
The 80/20 recession is real, and there is a growing scream from that majority that the current trajectory is untenable nor sustainable.
2025 will probably validate all of these fears.
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