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Paging Chip Diller: Wages drop 13% in April, inflation rises, consumer spending cools

This didn’t age well, at least for the moment. Yesterday, Joe Biden defended his economic plan for “working Americans” by pointing to wage improvements, among other metrics. The results of his policies, Biden claimed, showed that economic improvement was spread across the board, not just for the wealthy.

He might have waited a day before making this claim:

After weeks of defending his economic policies against critics who blame them for overheating the economy, President Joe Biden went on the offensive Thursday, arguing that rising wages are a sign his agenda is boosting the fortunes of working Americans.

“The bottom line is this: The Biden economic plan is working,” said the president in a speech at Cuyahoga Community College in Cleveland, Ohio. “We’ve had record job creation, we’re seeing record economic growth, we’re creating a new paradigm. One that rewards work — the working people in this nation, not just those at the top.”

Put simply, none of the above is true or attributable to Biden’s policies. Instead of “record job creation,” job expansion unexpectedly stalled in April. We haven’t seen “record economic growth” either, not in Q1, which produced a 6.4% increase in annualized GDP — but still far below 2020Q3’s 33% annualized growth rate, and with much more lost ground to make up. Even the “new paradigm” is largely a myth; Biden’s going back to Barack Obama’s “shovel ready jobs” paradigm.

It turns out that the wage growth claim was largely a myth, too. After getting goosed upward in March after two major tranches of stimulus spending, wages fell in April by 13.1% as those benefits ran out. Consumer spending on goods fell 1.3%, too:

Personal income decreased $3.21 trillion (13.1 percent) in April according to estimates released today by the Bureau of Economic Analysis(tables 3 and 5). Disposable personal income (DPI) decreased $3.22 trillion (14.6 percent) and personal consumption expenditures(PCE) increased $80.3 billion (0.5 percent).

Real DPI decreased 15.1 percent in April and Real PCE decreased 0.1 percent; goods decreased 1.3 percent and servicesincreased 0.6 percent (tables 5 and 7). The PCE price index increased 0.6 percent. Excluding food and energy, the PCE price index increased 0.7 percent(table 9).

At the same time wages and consumer spending fell off their stimulus-induced sugar highs, inflation picked up significantly over expectations. The 3.1 increase in so-called core inflation surprised economists and signaled a potential inflation problem in the short term, at least:

A key inflation indicator rose 3.1% in April, faster than expected, as price pressures built in the rapidly expanding U.S. economy, the Commerce Department reported Friday.

The core personal consumption expenditures index was forecast to increase 2.9%. Federal Reserve officials consider the measure to be the best gauge for inflation, though they watch a number of metrics.

As part of its price stability mandate, the Fed considers 2% to be healthy, though it is committed to letting the level average higher than usual in the interest of promoting full employment.

The Associated Press thinks this is all to be expected, and that economic growth should be even more robust in Q2:

Friday’s report from the Commerce Department also showed that personal incomes, which provide the fuel for spending, tumbled 13.1% in April. But the drop in income was expected, having followed a record 20.9% income gain in March that reflected the billions in one-time checks to most adults.

The April gain in spending supported the view that the economy is rebounding rapidly as individuals and businesses grow increasingly confident enough to spend, hire and invest. On Thursday, the government estimated that the economy grew at a robust 6.4% rate in the January-March quarter, powered in large part by consumer and business spending.

The economy is thought to be expanding even faster in the current April-June quarter. The outlook for the rest of the year is brightening, too, on the strength of trillions of dollars more in government support, increased mobility as vaccinations keep increasing and a surge in pent-up consumer demand.

The Q1 result was powered in large part by two tranches of helicopter money. Frankly, it’s mystifying to see the claim that businesses are “increasingly confident enough to spend, hire, and invest.” The BEA’s intermediate report on GDP released yesterday shows gross private domestic investment fell in Q1 despite two massive tranches of stimulus funding, dropping by 4.7%. Business construction fell almost six percent in that period. Furthermore, exports fell by 2.9% while imports increased by 6.7%, which is not a good sign at all of domestic business investment.

Also worth noting: while gross domestic income rose 6.8%, final sales of domestic product rose 9.4%, three points over the annualized GDP growth rate. That either indicates a massive sell-off in inventory, heavily discounted sales, or a mix of both. That’s not a great sign of sustainable growth, although the accelerated reopening of retail and other commercial operations will hold the promise of making up for it. That isn’t an economic strategy or policy as much as it is the end of a public-health emergency, though.

Even on wages, the AP misses the point. A look at the historical data in today’s BEA release shows that wage increases have mainly come as a result of direct government stimulus payments. In January and March, it went up by double digits as those funds got disbursed. In February and April, wages fell sharply as the cash stopped. They’re sugar highs from one-time (or three-time, to be accurate) artificial cash infusions. They aren’t sustainable, and their impact on consumer spending has been just as sugar-high as the payments themselves. At best, it appears that the stimulus payments is shifting demand from future months into the present, much in the same way that the 2009 stimulus package did with several of its programs — such as Cash for Clunkers.

The inflation issue threatens to erase even the positive aspects of these economic metrics. Biden has a personal and political interest in claiming success in the short term, but it’s beginning to sound a bit like Chip Diller in the inflationary sense. All is not well, and all of these sugar highs are about to give us a bad case of inflationary diabetes.