1992: “IT’S THE ECONOMY, STUPID” FAST FORWARD TO 2024: “IT’S INFLATION, STUPID”

October 11, 2024

CONSUMER BUYING PRICES

1992: “IT’S THE ECONOMY, STUPID” FAST FORWARD TO 2024: “IT’S INFLATION, STUPID”

In 1992, Bill Clinton asked his chief strategist, James Carville, what was the main voter issue. Carville answered, “It’s the economy, stupid.” This year Carville would probably answer “It's inflation, stupid.”

Also, in 1992, because of the recession and third-party candidate Ross Perot taking votes from Bush, Clinton won. Interestingly, the economy was actually recovering in 1992, and by the time Clinton took office in 1993, the economy was expanding and it had nothing to do with Clinton.

As we approach an election, it is important to understand the current economic situation.

• 15 million new jobs have been created since June 2020. Unemployment is 4.1% and everyone who wants a job can work.
• Real GDP is up 2.3% annualized since 2020 and up 6% for the last 2 years.
• Inflation is under control and nearing 2% on an annual basis, as measured by the PCE, Personal Consumption Expenditures. Core PCE inflation over the last four months has been running at an annualized rate of 1.8%.
• The Fed for the first time in 4 years dropped interest rates by 0.5% in September and is calling for 2 more drops this year.
• Consumer spending remains strong.
• Consumer Confidence is at a 5-month high.
• Personal Disposable Income is up 5.6% in the last year.
• The Dow Jones is up 48%. The S&P 500 is up 80% and the Nasdaq is up over 100% in the last 4 years.

Normally economic data like this would strongly favor the incumbent party. Not this year.

“It’s inflation, stupid.”

Here’s the numbers since January 2020.

• The Consumer Price Index is up 21.2%. ?
• Personal Consumption Expenditures, the Feds favorite inflation measure is up 18.0%.
• Car prices are up 30%.
• The median price for new homes is up 70%.
• Food prices are up 25.4%.
• Disposable Personal Income (DPI) is up 31%. DPI is?the money a person has left after taxes and other mandatory withholdings to spend or save.
• Food prices are 11% of DPI, Disposable Personal Income.?Since DPI is up 31%, the consumer on average still has 21% more to spend on rent, travel, medical bills, and other expenses. ?

A recent consumer survey by Axios found:

• 88% of respondents agree with this statement: "Gas, groceries and housing costs — not stocks — are the real economic indicators I care about."
• 76% of respondents — and 82% of Republican and Hispanic respondents — agree with this statement: "Economists may say things are getting better, but we're not feeling it where I live." ?

In summary, the bottom line is the economy is rock solid. Inflation is falling and is close to the Feds target of 2%. With unemployment at 4.1%, everyone who wants work can find it. With disposable personal income up 31%, the average consumer is still far better off even though they don’t feel like it. Despite what many consumers say and feel, consumer spending continues to expand.

Tariffs: The devil is in the details

Tariffs are taxes placed on goods we buy from foreign countries to protect our manufacturing industries. These taxes are collected by our government. That’s the good news. The bad news is those tariffs are then passed onto the consumers and raise the prices for us, causing inflation.

But wait, there is more bad news. The countries that we place tariffs on retaliate. You want to hurt our exports? We will hurt your exports too. In 2018 Trump put tariffs on some Chinese goods. Biden kept these tariffs and has recently added new ones on electric vehicles. China retaliated in 2018 with tariffs on soybeans and pork products hurting our agriculture producers. Most other countries we placed tariffs on also retaliated with tariffs on U.S. products. ?

Tariffs become a circular game. What are the net effects of tariffs? According to the Tax Foundation, academic and governmental studies found that the Trump-Biden tariffs have raised prices and reduced output and employment, producing a net negative impact on the U.S. economy.

The Tax Foundation is the world's leading nonpartisan tax policy 501(c)(3) nonprofit. According to Wikipedia, it's described in the media as business-friendly, conservative, and center-right. For over 85 years, its mission has been to improve lives through tax policies that lead to greater economic growth and opportunity. ?

My research has found that the new proposed Trump tariffs will cost consumers about $1800 per year. Kamala Harris has said it would cost consumers $4000 per year. Trump says it won’t cost consumers anything and that foreigners will pay for it. Hey, it's an election year so don’t believe everything, or most likely anything, you hear.

The devil is in the details and as Upton Sinclair said, “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

INFLATION

The bumpy downtrend continues

• The Consumer Price Index (CPI) for September eased to a three year low of 2.4%.
• Core inflation for September was 0.2%. Year over year it was 3.3%, slightly higher than last month.
• Personal Consumption Expenditures, PCE, the Fed’s preferred inflation measure for August fell to a 0.1% gain and are up 2.2% in the past year compared to a 3.4% gain in the year ending in August 2023. Core prices, which excludes the ever-volatile food and energy categories, also rose 0.1% in August and are up 2.7% versus a year ago, a notable improvement from the 2.8% reading for the 12 months ending August 2023. Core PCE inflation over the last 4 months has run at an annualized 1.8% below the Fed’s target and lowest since the period encompassing the onset of the pandemic in 2020.
• This trend should let the Fed decrease the interest rate by 0.25% in November.

MANUFACTURING

Manufacturing remains choppy

The Manufacturing PMI (ISM) was 47.2% in September, the same as August. The overall economy continued in expansion for 52 months. Note that a Manufacturing PMI above 42.5% over a period of time generally indicates an expansion of the overall economy. The September trend was slightly better for a few key indices. The New Order Index, 46.1% up 1.5%, the Production Index,48.9% up 5% and the Backlog of Order Index 44.1% up 0.5%. The Price Index fell into contraction to 48.3%, down 5.7%. The Employment Index fell to its lowest level in 4 years, 43.9%, down 2.1%.

• US non-defense capital goods new orders, excluding aircraft, rose 0.5% versus a consensus expected +0.1%.
• Shipments of core non-defense capital goods, excluding aircraft, an essential input for business investments in calculating GDP and a leading manufacturer indicator, rose only 0.1% in August following a 0.4% decline in July. If unchanged in September, this measure would decline at 1.8% annualized rate in Q3 versus the Q2 average. That would be the third quarter in the last four where core shipments have declined.
• New and existing home sales continue to be flat with up and down fluctuations. With the 30-year mortgage rates dropping from 7.2% in late April and nearing 6.0%, home sales should pick up.
• Car and light truck sales are forecasted to be 15.7 million this year, up slightly from 2023. Pre-pandemic 2019 car sales are down 8% while the average price of cars has gone from $34,000 to $44,467.
• The NFIB, National Federation of Independent Business, reports that small business confidence fell 2.5% in August to 91.2%.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our ten locations and a diverse industrial base. Based on our twelve-month trailing average, September was even.

CHINA

Still trying to fix its economy

China has recently pledged more fiscal and monetary support for the economy and promised more action to stabilize the property sector. Unfortunately, the pledge was short on details.

The initial announcement, which included rate cuts and a pledge of billions of dollars in support for China’s ailing stock markets, cheered investors with its breadth. Commodity markets also rallied. And then they retreated.

The fundamental problems remain an aging population and one that is shrinking because of the one-child policy. Consumer confidence continues to suffer from the COVID lockdown. Housing and construction were one-third of China’s GDP. Its surplus housing units are estimated at a whopping 90,000,000. That would be the U.S. equivalent of 18,000,000 or 12% of available residences. Many of these units are in much smaller cities with declining populations. Many Chinese people invested in 2 and 3 houses when the prices kept going up. The values have shrunk dramatically, and sales are limited now because there is a lack of buyers, and the government won’t let the prices fall to the market value. Those are just some of the issues they are facing.

So far, the government’s support looks like putting lipstick on a pig. They are going to need a significant economic stimulus to fix their problems. They have not shown the tenacity or courage to do this.

Their official September PMI was 49.8, up from August but still in contraction. Caixin fell in to contraction in September to 49.3, the lowest reading since July 2023. A sub-index of new orders plunged to a two-year low as firms cut back on headcount. All of this is important because China consumes approximately 50% of non-ferrous and ferrous metals in the world.

METALS

Section 232 metal tariffs

To protect the U.S. steel and aluminum industries, in 2018 Trump enacted (and Biden kept them) Section 232 tariffs on Chinese steel, aluminum, and derivative goods. They currently account for $2.7 billion of the $79 billion in tariffs, based on initial import values. Current Chinese retaliation against Section 232 steel and aluminum tariffs targets more than $6 billion worth of American products with an estimated total tax of approximately $1.6 billion.

Most tariffs have been directed at Chinese imports to protect American industries. China has been known to dump its excess production on the world at below their production costs. The losses are subsidized by the Chinese government and once the domestic competition goes out of business, the Chinese can raise the prices to where they want.

The U.S. and Europe have also placed high tariffs on Chinese Electric Vehicles. There are 100 Chinese car makers now, down from 500 four years ago. The best-rated maker is BYD, and they sell their low-end vehicle for $10,000 in China. Protecting our car makers with high tariffs will protect our car industry and the jobs it creates. The trade-off is that consumers pay more for domestic EVs.

With the moderate Chinese stimulus measures and more expected, prices of metal have gone up in the last three months. Spot prime aluminum has increased from $1.20 on August 1 to $1.38 on October 1. That is close to the high of the year on June 1. Prime aluminum scrap prices have also risen. Secondary aluminum prices fell slightly in October. Copper prices were up 15% and nickel was up 6%. Stainless steel prices were flat. Ferrous are expected to be level as well.

CLOSING

I have presented the economics, inflation and tariffs data on where we are now. The economy is strong, the annual inflation rate has fallen from 9.1% in 2022 to nearly 2%, and unemployment is low. Even though tariffs are inflationary, when used strategically, the U.S. as a whole gets a less-vulnerable, more-diversified supply base.

Economics is a major factor in determining for whom we choose to vote. That’s why the Clinton campaign used, “it’s the economy, stupid.” The problem is that we don’t all agree on the issues that will influence our votes.

It is up to us to exercise our right to vote for who we believe can lead us in the right direction over the next four years. The only thing we can agree on in this election is that each side thinks they’re screwed if the other side wins. Either way, make sure you vote.

P.S. Maddie Carlson’s Sustainability Insights is another blog we are sending your way. I am so excited about Sustainability Insights as it aligns with Shapiro's purpose of Making the Planet Better Together. Shapiro has launched Circular by Shapiro (circularasaservice.com) to provide the environmental metrics and data needed to reach sustainability goals.

“Vote for the man who promises least; he’ll be the least disappointing.” - Bernard Baruch

"Life is good. Family and health are precious."?

Bruce Shapiro

Thanks for Reading.? Not a subscriber??Sign up below.?

Subscribe