The prevailing sense that something is amiss with the economy is becoming increasingly evident. Hope and optimism regarding potential improvement are waning, creating a palpable uncertainty in the air.
Recent data points released on Friday further affirm that the economy is not merely stagnant, but rather deteriorating.
According to the Bureau of Labor Statistics, producer prices dropped by 0.4 percent last month and have decreased by 1.6 percent on an annualized basis. Typically, wholesale prices decline when the dollar strengthens, but they also drop in response to weakened demand.
One might expect that a robust dollar would spark greater demand in the U.S. for imported goods; however, that’s not the case. The Wall Street Journal reports that “imports fell in both September and October at each of the three busiest U.S. seaports” for the first time in a decade.
The decline in demand for goods from China and other exporters likely contributes to weakened U.S. retail sales. Currently, indications are that this is indeed occurring. The Commerce Department notes that retail sales in October only increased by a slight 0.1 percent. What should we make of this?
Gasping for Air
The consumer plays a crucial role, representing 70 percent of the U.S. economy. Retail sales comprise approximately one-third of consumer spending, with the remaining two-thirds focused on services.
Sluggish retail spending might hint at a rise in service expenditures. So far this year, nominal dollars spent on services have accounted for 67.5 percent of total consumption, up from 66.6 percent during the same timeframe in 2014. This suggests that despite challenges, consumers may still be driving the economy forward.
The true impact of this shift will only become clear with the release of the fourth-quarter GDP results. Currently, it is evident that Wall Street, with its forward-looking perspective, is concerned about retail’s viability. Shares of Walmart, for instance, are down approximately 32 percent this year, whereas Target has seen a decline of about 4.7 percent, with a more significant drop of 15 percent since mid-July.
Both Walmart and Target are scheduled to report third-quarter earnings on Tuesday and Wednesday, respectively, and analysts predict a decrease in quarterly revenues for both retailers. However, it remains to be seen just how much of these expectations are already reflected in their stock prices.
Even high-end retailers are facing challenges. For example, Macy’s stock is down over 41 percent this year, while Nordstrom has experienced a decline of more than 26 percent.
The Next Frauds to Come Down the Turnpike
In essence, many retail stocks are already in a bear market, marked by a drop of 20 percent or more. Those that haven’t reached this point may soon follow. The anticipated year-end boost from Black Friday earnings could turn into a significant disappointment.
A survey by retail research firm Conlumino indicates that “45 percent of shoppers plan to spend less on Black Friday this year compared to last year.” Another 24 percent intend to spend about the same, while only 18 percent are prepared to spend more. The remaining 13 percent, who opted out of Black Friday last year, plan to do the same this year.
The combination of declining wholesale prices and tepid holiday demand could indicate a deflationary trend in the economy. This is particularly concerning for the Federal Reserve, which is aiming for consistent price inflation.
Specifically, the Fed seeks a steady 2 percent inflation rate to stimulate consumption, facilitate economic activity, and reduce the burden of debt. However, economic realities often defy the intentions of planners. Instead of inflation, the Fed may confront the specter of deflation, which they dread the most.
When deflation sets in, a vicious cycle can ensue; falling prices lead to decreased spending, which exacerbates bankruptcies across personal, business, and governmental sectors. As businesses collapse, unemployment rates surge.
In the aftermath of the Great Recession, the Federal Reserve implemented unprecedented monetary policies to prop up prices. These measures, whose effects we are witnessing today, produced inflated asset prices yet stunted the economy. Given the nearly $4 trillion in debt monetization that has transpired, the Fed is likely to escalate its efforts in response to the next deflationary threat.
We may soon witness negative interest rates, where banks charge customers for holding their money, and “QE for the people,” a scenario in which the Fed creates money to distribute directly to individuals. These potential strategies may be the next waves of economic folly headed our way.
It’s wise to prepare for the imminent fallout from these developments.
Sincerely,
MN Gordon
for Economic Prism
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