In a recent commentary to a blogpost by Michael Roberts where he argues inflation has been, and remains, largely a supply side driven phenomenon–with which I’ve also argued for months–I provided the following comment to Roberts’ blog and point. I note, however, that Roberts misses discussing an important ‘supply’ factor–corporate price gouging.
I also agreed with him expressing doubts about a ‘soft landing’ for the US economy that’s become a mantra of sorts by mainstream economists and especially Biden administration politicians. In my comment below I describe why US growth–and a soft landing–is unlikely to be driven by household consumption starting 4th quarter 2023. And other elements of US GDP–business investment, net exports–show important elements of weakness. Only US government spending on war and defense appears a strong growth area and thus contributor to a ‘soft landing.
My Commentary to Michael Roberts’ blogpost:
I agree with your main point that inflation has been driven largely by supply forces. However, your analysis of Supply is missing a couple important elements. First, monopolistic corporate price gouging (a supply factor) has played an important role in recent inflation. Industries guilty of such pricing include not only the obvious energy corps (gasoline, fuel oil, diesel), but food processors (like baked goods, meat packing, etc), big pharma (generic drugs) gouging, regulated utilities (actually monopolies in their markets), insurance companies (esp. auto), food distributor companies with school meal contracts, and others. Another ‘Supply’ factor has been the collapse of productivity. While you mentioned this, more might have been said about the role of productivity decline in escalating unit labor costs (the other joint factor being nominal wages). Productivity collapse pushes up unit labor costs which, to the extent a given company can, it passes it on into higher prices. There’s no analysis or data on this in the US stats but it plays a role in recent price inflation.
The major takeaway that describes inflation in the US, is that services prices are chronically stuck at around 6% despite the fasted Fed rate hike runup ever. Fed chair Powell a year ago targeted services prices as the key remaining area that needed to come down, since goods prices, including energy, was declining in 2022. Services inflation was and remains the inflation bogeyman, which the Fed’s plan to create services unemployment and therefore a decline in households’ disposable income, and therefore Demand has almost completely failed. In short, rate hikes can’t and aren’t resulting in services demand contraction of any meaningful dimension.
As for the latest mainstream pundit mantra of ‘soft landing’: It’s very doubtful. Why? nominal wage income is slowing. Student debt payments of hundreds of dollars on average are set to begin again in October. Credit card debt for households is at a record $1.27 trillion and delinquencies rising. So called excess savings from Covid era social stimulus are now only .2T and down from $2.1T, according to Chase bank CEO Jamie Dimon. A government shutdown in 4th quarter looks more likely than ever before in recent years as the capitalist politicians struggle with how to deal with another $1.7T budget deficit this year, a $33T national debt, and interest payments annually on that debt at $644B (compared to <$300B in 2019) due to chronic high Fed rates. More austerity in social program spending in 2024 is almost guaranteed. That too will negatively impact GDP. Then there’s the current auto strike that looks likely to continue well into 4th quarter that even mainstream economists predict will take 0.4% off of 4th quarter GDP. In short, consumer spending is nearly 70% of the US GDP and it’s difficult to see how that spending this winter, due to the factors noted, can keep the US economy from avoiding a recession (a hard landing).
Adding to the pressure on GDP, with a chronic high dollar (due to chronic high Fed rates) will mean less US exports (also due to a slowing global economy) and in turn a further negative ‘net exports’ impact on US GDP. Finally, there’s the rapidly slowing bank lending in Commercial & Industrial loans which suggests a slowing in net real business investment for small and medium businesses.
The only factor clearly raising the possibility of a ‘soft landing’ is federal government defense spending as US neocon run foreign policy continues to spend on the Ukraine proxy war and simultaneous preparations longer term for war with China.
Dr. Jack Rasmus,
September 23, 2023
Dr. Jack Rasmus @drjackrasmus
Jack Rasmus 