The Armchair Economist: The US Economy – What a Pickle

I read a few articles recently that, when taken together, help explain what a pickle the US economy is. I say pickle, since for the last year or so economists and Federal Reserve leaders continue to fluctuate between recession, soft landing, and more recently, no landing. Worse, those economy watchers are not all in the same camp at the same time.

Here are the few stories that demonstrate the conflicted messages not so hidden in the tea leaves.

Corporate Profits

WSJ: Cooling prices hit corporate profits , September 6th.

The US Commerce Department recently reported that after-tax US corporate profits were down 9.4% in Q2. This was noted in the article as more severe than the 2.9% decline in EPS for firms in the S&P 500 over the same period.

A key driver it seems is inflation. Until recently prices were increasing faster than wage costs. As such, some margins increased. Now consumer prices increase are increasing at a slower rate than wage costs. Margins are being reduced.

The article also notes how inflation “effectively understates the impact of wear and tear on companies’ assets because in business accounting depreciation is generally measured at historical cost; after inflation, the actual cost of replacing assets is higher.”

Bottom Line: Inflation is slowing down (prices are still going up but at a slower rate) and is negatively impacting business performance.

Consumer Spending and Debt

WSJ: Credit-card debt is rising - we only have ourselves to blame , August 29th.

Despite rising credit card interest rates, it seems that the recently achieved “goal” of $1 trillion overall credit card debt is due to us. Consumer spending overall is holding up, but fewer of us are also paying off those balances.

More recently, look at this NBC article: Inflation is driving up consumer credit card debt by billions of dollars . Here is an interesting point:

“Newly released data from WalletHub says U.S. consumers took on $43 billion in additional credit card debt during the second quarter of this year, ending in June. That's more than triple the average amount of new debt households have taken on in that period since after the Great Recession of 2007-08.”

Most chilling: those consumers who are slowing their spending, and increasing debt, are more likely to be those of us with lower wages and less savings. ?For these folks, today may look and feel like a recession.

Bottom line: While a general slowdown is not really visible, a real slowdown is taking place with that part of society less able to cope with the financial stresses. Wealth inequality is likely to widen.

Real Wages

WSJ Opinion: The Census Exposes Bidenomics , September 14th.

Ignoring the obvious politics, the White House’s own Census Bureau published data that shows how medium real incomes between 2019 to 2022 have declined. Real incomes are actual or nominal incomes discounted for inflation. If you earn $100 and inflation is 10%, technically your spending power is reduced by 10%? You might take home the $100 bill, but it buys less goods and services than before.

Inflation is slowing today – but prices are still going up. We are way down from the 9% recent highs. But inflation is still positive, higher than the Feds target of 2%, and accelerating again slightly. So, unless your wages exceed the range of inflation we see, you (and me) are getting poorer.

Bottom line: Consumers are getting squeezed, but not evenly or equally.

Who Dares, Wins

WSJ: Rate hikes make big companies richer , September 16-17th.

This one will make you squirm. Here is a comment that exposes the key point.

“Take Microsoft, the world’s second-most valuable company. It has more cash and short-term investments than debt, so it was never going to be threatened by higher rates. But it has also fixed its borrowing costs: It paid exactly the same interest, $492 million, in the latest quarter as a year earlier. However, it earned substantially more on its cash and short-term investments, with the annualized rate rising to about 3.3% from 2.1%; combined with a small increase in its hoard to $111 billion, it earned $905 million in interest just in the quarter, up from $552 million.”

Simply put, firms with more cash and liquid assets than debt are not being hampered with increasing interest rate! That debt needs to be stable, as in not needing to be rolled over during the period of high interest rates. In such cases, and Microsoft is the example, they are beneficiaries of the current interest rate rise.

The article looks at some research that suggests the big, large firms that dominate many sectors are in this position. This is damning since the Fed is trying to slow business activity with higher interest rates. If you don’t need to enter the debt markets, and if you can find investments with cash or other liquid assets, you don’t need to slow down capital spending.

Bottom line: Frontier firms, who already dominant in their respective industry, are likely to further accelerate away from all their competitors. Those competitors will get “hit” by the interest rates earlier and harder.

The Pickle in the Making

At the end of the day there are so many distortions in our economy that many traditional measures and models are not behaving as expected. The growth of regulation, state intervention, unintended consequences, and an elongated period of next-to-zero interest rates, have undone many assumptions that economists understood and rely on. ?The free market is hardly that.

I am in the camp that suggests we will still experience a recession, perhaps by Q1 2024. The sad news is that it will a very unfair recession. And instead of freeing up the market - and the individual- to do what is in our own best interests, we will decide to try to fix everything with yet more policy, and politics. It is such a pickle that shows no sign of being unpickled.

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