Making Sense of the Contradictory Economic Numbers
The economic fundamentals suggest a recession is on the way or already here. Cutting taxes and spending are the proper response.
It appears that the United States is about to get the recession that has been widely predicted for three years now—and which people were finally becoming convinced was going to be averted. We may, in fact, already be in a recession. If not, there is still a chance to avert a contraction, and there are indications of Trump administration efforts in that direction.
The biggest signs of the slowdown are not in the stock markets but in the other major economic data and economic fundamentals.
Friday’s report on March wholesale prices “shows prices for final demand down 0.4% and prices for final demand goods were down 0.9%,” notes economist Robert Genetski, Ph.D., showing a major decrease in inflation. Genetski expects direct news of a downturn when numbers for individual sectors arrive next week:
March retail sales data are expected to be down slightly from February and down from the fourth quarter average. Although retail sales data are erratic and often unreliable, they have been consistent in showing a growing weakness in the economy.
Also on Wednesday, the April Homebuilders’ survey is likely to continue to confirm a recession in the new home market. The March survey was at 39 (50 is breakeven). We expect the April number will be even lower.
Finally, business surveys indicate the Fed’s Wednesday report on March manufacturing will be flat to down.
The prices of goods “were depressed by an 11.1 percent tumble in the cost of gasoline” as “[c]oncerns about slower global economic growth because of trade wars have weighed on oil prices,” the New York Post reported on Friday. Wholesale food prices dropped by 2.1 percent. However, goods prices other than food and energy rose by 0.3 percent for the second month in a row, the Post reported. Prices for steel mill products rose by 7.1 percent.
Overall, the economy appears to be headed down. “The anticipated surge in inflation could, however, be tempered somewhat by softening domestic demand, evident in March’s consumer price report that showed monthly declines in airline fares as well as hotel and motel room prices,” the Post reported.
The consumer sentiment gauge from the University of Michigan confirms that the public is feeling pessimistic about the economy. MarketWatch reports:
The University of Michigan’s gauge of consumer sentiment fell to 50.8% in a preliminary April reading from 57.0% in the prior month. It is the lowest level since June 2022. Sentiment has dropped for four straight months and is down 30% from December.
Economists polled by the Wall Street Journal had expected an April reading of 54.6%.
Interestingly, the public showed a big increase in fears of inflation:
According to the report, Americans’ expectations for overall inflation over the next year jumped to 6.7% in April from 5% in the prior month. That’s the highest reading since 1981.
Expectations for inflation over the next five years rose to 4.4% from 4.1% in March.
In a self-fulfilling prophecy, inflation fears can spur inflation itself, the U.S. central bankers argue: “Federal Reserve economists believe that if consumers expect high inflation, it will be easier for firms to raise prices, leading to higher price pressure,” the MarketWatch story reports.
In addition, “The share of consumers who expect unemployment to rise is more than double the reading of November and the highest since 2009,” MarketWatch reported.
Those two items together show a rising fear of stagflation: price inflation plus economic contraction.
The public is clearly taking cues from economists who state that tariffs cause inflation and recessions. “The survey closed before President Donald Trump announced his tariff plan,” MarketWatch notes, so these sentiments were based on the reigning theory of the case, not any tariff effects that have yet to happen (and will not, if the offers from other countries to cut their import barriers come to fruition). The theory may be right, but reality does not always agree. The notorious stagflation of the 1970s happened while tariffs were low and falling:
Source: National Bureau of Economic Research
The consumer pessimism makes sense both as a reaction to economists’ predictions and, more importantly in my view, to the poor condition in which the federal tax, spending, deficit, debt, and regulation policies left the economy after four years of intensive government interference in the U.S. economy. As Seeking Alpha reports,
The U.S. federal government spent $161.0B more than it earned in March, wider than the $115.9B deficit expected and narrowing from February's $307.0B shortfall, according to the Treasury Department's monthly statement released on Thursday.
Its fiscal year-to-date deficit totaled $1.31T, surpassing the $1.06T deficit recorded over the same period a year ago. The government's fiscal year ends on Sept. 30.
Receipts of $367.6B climbed from $296.4B in the earlier month and $332.1B a year ago, while outlays of $528.2B slid from $603.4B in February and $568.6B a year before.
With borrowing costs staying elevated, net interest paid on the national debt was the government's second-largest outlay for the month, at $489B.
The fiscal crisis also helps explain the current combination of a falling U.S. stock market and decreasing demand for U.S. Treasury bonds, which generally move in opposite directions. The expectation of a downturn should push bond yields up by making U.S. Treasuries less attractive, forcing the government to pay a premium to get people to buy. That continued this past week.
A recession reduces the amount of money the U.S. government takes in through taxes, and that means that the U.S. federal debt will rise more rapidly unless Congress and the president cut spending—which they never do in the runup to a recession. Lawmakers’ response is always to follow the (horribly false) Keynesian principle of increasing government spending in an effort to push up demand and force people to buy things. That increases the deficit and debt and makes government bonds less attractive by reducing the expected returns. That is a recipe for further economic contraction and inflation.
Ordinarily, this does not happen when stock prices are going down. Inflationary devaluation of the dollar should push nominal stock prices up. What I wrote in the previous paragraph explains that: the government’s reaction to a recession is to spend more money, which pushes stock prices back up as more money flows into the economy, and bond prices head down because the government’s ability to pay them off decreases.
Many analysts are offering a conflicting explanation, arguing that bond prices are falling (and yields rising) because other countries (especially China) are getting out of Treasuries, as CoinDesk reports:
While Hansen pointed fingers at foreign selling, especially China, which is said to have offloaded $50 billion in Treasuries, Jim Bianco, president of Bianco Research, challenged that narrative.
“No, foreigners were not selling Treasuries to punish the U.S. (Trump),” he wrote, pointing instead to a sharp rally in the Dollar Index (DXY), which climbed 2.2% in just three days.
“If China or other foreigners were selling Treasuries ... they would have to convert those dollars to a foreign currency. Otherwise, selling Treasuries and leaving the money in dollars in a U.S. bank is pointless. If they sold enough Treasuries to swing yields ... the subsequent selling of dollars ... would have driven down the dollar. Instead, it rallied more than usual.
“This suggests that foreign money was moving into the U.S., not away from it ... the selling was more domestic and more concerned about inflation.”
Bianco’s observations support the idea that fear of a recession-induced increase in the federal deficit is what is pushing bond prices down and yields up, as I suggested above, though he blames expectations of inflation.
Meanwhile, stocks are rising again, in what The Wall Street Journal calls “market turmoil unleashed by President Trump’s trade war”:
That seems a rather churlish way to describe a stock market recovery, but it’s understandable, I suppose: everybody hates to be proven wrong.
My thought is that the agreement between the House and Senate on the amended budget resolution, announced midday on Thursday, had much to do with the resumption of the stock price recovery, which had been slowing down on Thursday morning.
The stock market’s correction of its earlier correction (soon to be followed by further contradictory corrections, I imagine), plus the bond market’s unusual behavior, together suggest that investors are confused about which effect of screwy government policy will predominate in the coming months: inflation or recession. The stock and bond markets both appear to have been reacting mainly to different outcomes of the recession signal: stocks rising and falling with the apparent likelihood of overall growth or contraction, and bond markets reacting to the likely longer-term effects on government revenue.
There appears to be little likelihood that President Trump and the dual-GOP-majority Congress will fuel inflation by increasing spending. (Though some Republicans are foolishly suggesting raising the top tax rate to 40 percent, it is clear that Trump opposes that, rightly.) The trend is in the opposite direction, if anything.
The upcoming extension of the 2017 tax cuts will help greatly. Even more important are the efforts the administration is making in cutting spending. A cut of a trillion dollars per year would avert a recession or reverse it if we are already in one.
In fact, it would spark an economic boom. That is what DOGE chief Elon Musk is calling for and forecasting. If he is correct, the economy will quickly right itself, and happy days will be here again.