VISUALIZING THE FOOD & ENERGY CRUNCH

Shades of 2008 in this data….As we see housing prices continue to slide, food and energy prices are surging and eating into consumer spending.  The following chart shows the food price index over the last 20 years.  As you can see, prices are now above their 2008 highs:

While we’re seeing some marginal signs of cost push inflation the impact is not yet blunting consumer spending as it largely transfers spending from discretionary to these non-discretionary items.  As David Rosenberg notes, the crunch is on:

“As we explain below, the outlook for the U.S. consumer is grim. Much of the payroll tax cut is now being absorbed by higher food and energy costs (gasoline prices have jumped more than 50 cents this year). In fact, over the past three months, 100% of the $55 billion increase in aggregate wages and salaries has been absorbed by the run-up in the grocery and gasoline bill. The labour market is not nearly as strong as it needs to be to provide the antidote, and at the same time fiscal policy is swinging from massive stimulus to moderate restraint (have a look at U.S. Muni Bond Demand Slides Into Deep Freeze — local levels of government are not able to raise money and as such are cancelling capital projects … sad but true… and outside of the consumer, this sector is the largest contributor to GDP). Also have a look at Michigan Cuts Jobless Benefit By Six Weeks on the front page of today’s NYT.

As the chart below shows vividly, over 22% of wages and salaries are now being devoted to the cash register at the local food store and at the pumps — we’ve only seen this level two other times in the past two decades and both ultimately landed the economy into recessions that ensnared discretionary household spending. The good news — a new bull market in frugality, ‘trade down’ goods and private label is likely on its way again. “

I am far from calling a repeat of 2008 (the environment is very different given the lack of the size in the debt bubble), however, the likelihood of a booming economy given these conditions is unlikely.  More likely, we see stagnant job growth as producers protect margins and relatively stagnant consumer spending.  For now, the sizable budget deficit is helping to bolster the economy.  The one risk the USA does not control is overseas strength and the bubble in food prices is putting a significant strain on emerging market economies.   Will it be enough to break the US economy?  For now, China appears to be hanging in there just fine, but the disequilibrium certainly warrants some caution regarding economic growth in H2.  We likely won’t see markets price this risk in until closer to the end of QE2….

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Once again, I’ll make the bullish argument re: this matter – consumers will happily take their savings rate down materially or into negative territory to sustain discretionary spending. Once this is tapped, they’ll merrily start to rack up incremental debt where they have access. As such, discretionary spending will stay the same and non-disc will rise as companies push through cost increases to sustain magins. On balance, this is Bernanke’s dream as it pulls forward overall demand and stimulates the economy (and more importantly, stock prices)…bet against the US consumers’ belief that he/she is entitled to spend and be willing to take a bullet to the brain…

  2. Man, are you cynical…Do you agree that the end result of it all is an even bigger calamity than the one we just had?

  3. The squeak is definitely one, the question is which of the three paths will the economy take? Shrink, Watch consumers dis-save (even go into debt) or the government will have to take up the spending gap.

    Unfortunately my money is on recession or another debt binge which can’t be sustained for long.

    The maddening thing about the right is they want to dis-assemble social security but at the same time they are making it impossible for the baby boomers (or anyone) to save!

  4. I think the big difference between 2007-2008 is that people understand that there are limits to the amount of debt households can handle so the insane leverage that took place doesn’t seem to be the current issue.

    I just don’t think the majority of the population can afford to live in this country anymore. Housing helped the middle class get by for 20-30 years. Now we are dealing with a whole different animal. I agree Cullen that it looks like constant deflationary forces for the foreseable future.

    With politics and social mood turning, I’m wondering if a 20 year Japanese type economy is not positive thinking. Before the earthquake, Japan’s standard of living was still very high.

  5. The strength in meat products makes me wonder if there is much more latent global strength then we think.
    In the US … very bad news for restaurants & high-margin producers. Maybe that’s a good thing; restaurants will stop pushing super-sized junky everything and selling over-priced sugar cereals.

  6. In our increasingly 2-tier economy, the top 10% spending will only be marginally affected. The lower 90% will eventually face a desperate need to choose a lower standard of living. After all, even the interest on their debt caught up with them, let alone reducing leverage. Japan has a much smaller spread in income distribution, and so is not a true comparison.

  7. I have to take issue with your stating that the difference between today and 2008 is “the lack of the size in the debt bubble.” A simple look at the explosion of the Fed’s balance sheet, the ECB’s balance sheet and the BOE’s balance sheet could easily point to an even larger debt bubble today than what existed in 2008.

  8. “the environment is very different given the lack of the size in the [private sector] debt bubble”

    Not sure I’d call private sector debt dramatically different than in 2007-2008 – the height of the debt binge …

    2007-01-01 13166.35
    2007-04-01 13402.37
    2007-07-01 13617.78
    2007-10-01 13803.23
    2008-01-01 13911.97
    2008-04-01 13897.48
    2008-07-01 13883.77
    2008-10-01 13801.24
    2009-01-01 13772.78
    2009-04-01 13706.70
    2009-07-01 13630.78
    2009-10-01 13566.75
    2010-01-01 13527.84
    2010-04-01 13444.78
    2010-07-01 13377.48
    2010-10-01 13357.93

    http://research.stlouisfed.org/fred2/data/CMDEBT.txt

    Household Sector: Liabilites: Household Credit Market Debt Outstanding (CMDEBT)
    (which is identical to …)
    Total Credit Market Debt Owed by Domestic Nonfinancial Sectors – Household Sector (HSTCMDODNS)

    Debt load as % of income, reduced due to ZIRP, better, okay, but overall private debt level is not that dramatically different these past few years.

    • And if I’m not mistaken, most of this reduction is due to financial institutions writing down bad household debt, not the private sector voluntarily getting into less debt.

      Which ties into B Ferro’s theme of the private sector not being able to control themselves, effectively.

      Private debt expansion, at this stage, is being controlled by how much debt the financial sector is willing to extend to the private sector, not by the private sector’s own self control. I do not believe the private sector has yet “found religion”. Maybe in ten years. Maybe. We’re talking entire generations of entitled citizens who do not understanding that real growth, and debt, rates cannot be logarithmic.

  9. What %age of wage & salaries goes to private debt service–specifically housing/mortgage? My sense is that the biggest deflationary threat still looms from housing, and it encroaches on the rest of the consumerism.
    If we get anything beyond QE2, I hope it’s more like an effective HAMP; something that targets housing specifically, as opposed to general stimulus that shows up in the most undesireable places (like commodity, food & energy).

  10. Dear Sir,

    As I have stated in one of your past posts the problem that the USA is most likely to face due to the mistaken policies of the current Obama Administration, is “Stagflation”; not hyperinflation. The policies of the current and past Executive, Legislative branches of government and The Fed are leading down this road. The price of Fuel (and Food among others) is simply the “canary in the coal mine” of what is to come.

    In “The Hill” today, I saw an article from “Dick Morris” who is also of like opinion. Dick Writes:

    *** Obama’s legacy: Stagflation ***
    By Dick Morris – 03/01/11 07:12 PM ET

    Obama’s failure to support America’s allies in the Middle East and his dithering endorsement of chaos in the region will send oil and gasoline prices skyrocketing, triggering a massive bout of stagflation. This vicious cycle of rising prices, decreased consumption, and ever higher prices (as vendors seek to recover higher fixed costs) will cripple the American economy for years to come.
    This is Obama’s true legacy.

    Consider what he has done to push up oil and gas prices:
    • Endorsed spreading chaos in the Middle East.
    • First banned and now slowed down offshore oil drilling.
    • Considered curbs on fracking (horizontal drilling to unlock shale deposits in the Northeast — a potent new source of oil).
    • Imposed a carbon tax on domestically produced coal and oil through EPA mandate.
    •Proposed an end to tax advantages designed to encourage oil drilling and exploration.

    Now Obama is reaping the fruits of these misguided policies — $4-per-gallon gas, soon to go up to $5 or $6!

    And the fuel-price increases will take their place alongside food-price rises. Food prices for corn, soybeans, wheat and other basic crops have almost doubled in the past year.

    Dick Morris also supports my supposition that the Federal government has manipulated the CPI for its own ends:

    *** The Consumer Price Index deliberately understates fuel and food inflation in its formula to avoid triggering cost-of-living adjustment increases in private pay and government programs.***

    If you look up Dick Morris you see that he is a long-time friend of Bill Clinton and worked for the Clinton Administration. As such he is an “INSIDER” and would know the policies of the Presidency (and the rationale) at the time the CPI measurement was modified.

    Link to Dick Morris Article: http://thehill.com/opinion/columnists/dick-morris/146869-obamas-legacy-stagflation

  11. TPC, thanks for the info with regard to surpluses and depressions. One other question…how do you “reconcile” the stagflationary reality of the 70s. Cost push inflation seems like it shouldn’t exist in an economy with weak aggregate demand, but obviously it can. Youve probably addressed this before, but I must have missed it somehow. (btw, talking to people about mmt after you’ve seen the light is both invigorating and exasperating, as I’m sure you can attest. After a lengthy discussion, I just about told a good friend to go to hell today)

    • The bottom line is – how are Americans going to pay for it? Income are only rising at about 5% per year. Inflation lags that significantly. Americans can’t afford higher prices. It’s that simple. So we get crunched across the board.

      • The question is : Where is the Hockey Puck going?
        On one side we have:
        The “Depression” Team
        Their Captain (Front and Center)– “Loss of Real Wealth” is feeling cocky
        He is anchored by “House prices Crashing” at the goal Line
        Flanked by “No Jobs” on the right
        Flanked by “Loss of Real Wages” on the left
        And bench players: “Food Stamps Aplenty” and “Unemployment99″ and “Big Debt”
        Coached by: Foreclosure R Us

        On the other side:
        The “Inflation Express”
        Their Captain (Front and Center)—Bubbles Bernanke –looks determined
        He is anchored by “Raging Commodity Price”
        Flanked by “Money Printing” on the right
        Flanked by “Hide our Losses” on the left
        And bench players: Fannie and Freddie–Thats their handle–but no one knows where they come from and waiting in the wings “Stress Test”
        Coached by : Central Bankers

        Our Referee’s for today contest: Disc Spending and Non-Disc Spending

        Our score keeper: CPI –is the handle but know one is sure how he keeps score
        Some say this gives “The Inflation Express” an advantage.

        Both sides will win–”the outcome”—Hyper-Inflationary-Depression