Commentary
The University of Michigan consumer confidence index fell to 82.8 in May, from 88.3 in April. More importantly, the current economic conditions index slumped to 90.8 from 97.2, and the consumer expectations index declined to 77.6 from 82.7.
Hard data also questions the strength of the recovery. April retail sales were flat, with clothing down 5.1 percent, general merchandise store sales down 4.9 percent, leisure and sporting goods down 3.6 percent, and food and drink services up by just 3 percent.
U.S. manufacturing output was also almost flat in April, rising just 0.4 percent month-on-month in April pushed by a 4 percent slump in motor vehicle production. You may think this isn’t that bad until you see that industrial capacity utilization came in at 74.9 percent in April, significantly below the pre-pandemic levels.
Employment also questions the “strong recovery” thesis. Non-farm employment is still down 8.2 million, or 5.4 percent, from pre-pandemic levels, yet gross domestic product is likely to have a full recovery in the second quarter.
These figures are important because they come after trillions of dollars of so-called stimulus, and the entire thesis of the V-shaped recovery comes from a view that consumption is going to soar. Reality shows otherwise. In fact, reality shows that retail sales showed an artificial bump due to the wrongly called stimulus checks only to return to stagnation.
The rise in inflation further questions the idea of a consumption boom, certainly for the middle class. Why? If we look at the 4.2 percent rise in consumer price index for the 12 months ending in April, it includes a 25 percent increase in energy, a 12 percent increase in utility gas prices, a 5.6 percent increase in transportation services, a 2.2 percent increase in medical services, etc.
As consumers perceive a higher rise in prices, especially in those essential goods and services that we purchase every day, consumption decisions become more prudent and the propensity to save rises. This is something that we’ve seen in numerous countries. In Japan, years of “official” messages about the risk of deflation clashed with citizens’ perception of the cost of living, and the tendency to save increased, rightly so. Citizens are not stupid, and you can tell them that there’s no inflation or that it’s transitory, but they feel the rise in cost of living and react accordingly.
Two things should concern us. First, the weakness of the recovery in the middle of the largest fiscal and monetary stimulus seen in decades, and second, the short and diminishing effect of these programs. A $2 trillion stimulus package creates a very short-term impact that lasts less than five months.
I recently had a discussion with former Federal Reserve nominee Judy Shelton, and she stated that the recovery would be stronger without stimulus. She’s probably right.
Neo-Keynesians will likely say that if the above figures persist, the solution is more stimulus, but it’s not. More money to government programs means slower growth and weaker recoveries.
The American consumer is not happy. They don’t see the official optimism about the job market or the macro figures, and the current sugar-high is likely to lead to an abrupt sugar-low.
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
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