Inflation Alert! A dive into the Bureau of Economic Analysis Personal Income and Outlays for June from this past Friday, and the GDP numbers from Thursday. Lots of inflation-related 'goodies' for us to unpack...
According to data from the Bureau of Economic Analysis this past Friday, personal income (income that people get from wages and salaries, Social Security and other government benefits, dividends and interest, business ownership, rental properties, etc.), but without stimmies, enhanced unemployment, and other transfer payments from the government (adjusted for inflation), it is still lower than what it was in February 2020!
Yes, as we have covered, wages are rising but inflation is eating away at any increases in aggregate income! As we can see below though, real personal income without transfer payments looks like something sideways trading guy would be interested in covering, as it really hasn't improved despite more people back to work at higher wages:
Seasonally adjusted, real disposable personal income from all sources fell to $15,569.3 billion in June from $15,651.8 billion in May, and was down from June 2020s $16,057.3 billion:
Those 3 giant spikes starting in 2020 are the stimmies hitting.
People have been trying to spend this income too! However, adjusting for inflation, spending hasn't gone anywhere for months now. Heck, as you can see on the graph it is now lower than what it was in April!:
Inflation is eating our buying power!!!
Real spending on services (rent, healthcare, travel, hotels, baseball games, concert tickets, etc) was up in the 2nd quarter compared to the first but is still waaay below pre-pandemic levels.
During the pandemic, (largely because of lockdowns) the spending pendulum swung from services to goods, with it now swinging back to spending on services:
Compared to the 4th quarter of 2019, real spending on services was still down $283.558 billion ($8,222.339 billion vs. $8,505.897 billion)
As we just covered, real spending on durable goods is down compared to services. Since March's high of $2,433.6 billion, spending has fallen each consecutive month since to June's $2,221.5 billion:
Real spending on nondurable goods (gasoline, grocery store items, personal care, etc) was up, after being down in April and May, but is still below March's high:
Taken all together, we get a clearer picture as to why GDP 'only' grew at 6.5% in the 2nd quarter vs. 9.1% economists were predicting prior to last Thursday's release.
https://www.bea.gov/news/2021/gross-domestic-product-second-quarter-2021-advance-estimate-and-annual-update
This is definitely higher than most anything pre-pandemic years. However, as we have seen, expectations took a kick to the groin from INFLATION!
This lowest possible inflation measure available to US decision-makers was up 3.5% from June last year:
Core PCE over April, May, and June, annualized, was 6.7%!!!
Furthermore, the Fed's median projection for core PCE inflation is now losing sight with what we are actually seeing:
- December, core PCE projection for 2021: 1.8% (actual =1.5%)
- March, core PCE projection for 2021: 2.0% (actual = 2.0% and rising on a monthly basis)
- June, core PCE projection for 2021: 2.1% (actual 3.5% and now raging!)
This is destroying consumers spending power, let's dive in further:
Consumer spending: Between stimmies, enhanced unemployment benefits, and gains from stonks, consumer spending hit $13,675.7 billion in the 2nd quarter. Put another way, Consumer spending accounted for ~70% of GDP in the 2nd quarter! People have been getting and spending that cheddar:
However, the record trade deficit really pulled GDP down!:
Exports add to GDP, Imports subtract from GDP.
Fixed private investment (intellectual property, nonresidential structures, and equipment, residential structures): rose to $3,590.703 billion:
However, as we have covered previously, inventories continue to fall, with more and more shortages cropping up into the economy. Inventories dropped from $2,843.137* in the 1st quarter to $2,801.672 billion in the 2nd quarter:
*fixed the typo...
Lastly, government consumption (think fuel, supplies, office, etc) dropped from $3,390.921 billion to $3,378.009 billion:
At least government spending isn't blowing up--until that new infrastructure bill this week...
There we have it, after all of the stimulus, there is very little to show for it at this point. However, the Fed confirmed last Wednesday it's not changing course!
The Fed continues to plow away with $120 billion in assets purchases each month:
$40 billion a month in mortgage-backed securities. This will continue to depress mortgage rates and only continues to add gasoline to the inflation fire.
$80 billion in Treasury securities a month (with policy rates near 0%): represses short-term and long-term interest rates in general, and inflates asset prices and consumer prices, which further DESTROYS the purchasing power of the dollar.
While the rest of the world's banks are acting, the Fed still claims this inflation is โtransitory"...
TL:DR - The Dollar losing purchasing power + Inflation = Permanent Loss of purchasing power. Unless one of the many other catalysts triggers the MOASS, I believe inflation is the match that has been lit that will light the fuse of the rocket.
Buckle Up.
