Perfect economic storm buffeting Biden

Rarely in political events does punishment follow crime so quickly. Washington’s foreign and domestic policy blunders combined to produce the worst drop in real paychecks on record as well as the least public support for presidential economic policy. Friday’s report that consumer prices rose by 8.6% year-on-year as of June means a drop in inflation-adjusted weekly earnings of nearly 4%, worse than the depths of the 2008-2009 Great Recession. Taking into account underreported inflation in shelter, the actual inflation rate is closer to 11%, and the real drop in earnings is about 7%. That implies a political implosion for the Biden administration, which faces an 83% disapproval rating for its economic performance. By contrast, Jimmy Carter at the peak of the Great Inflation of the 1970s had a 78% negative rating for economic performance. Inflation was already roaring in February when oil traded at $88 a barrel, before US sanctions on Russian oil raised the price paid by US and European consumers. Russia continues to export oil to India, China and others at discounts of more than $30 a barrel, that is, at roughly the prevailing price before the Ukraine war. The sanctions didn’t slow Russia, but they clobbered Western consumers. Private surveys by Zillow and Apartmentlist.com show rental inflation running at around 16% year-on-year, and at an annualized rate of 15% during May. The US government says that shelter inflation is just 5.5% over the past year. The private surveys reflect new leases rather than the average paid by renters, but the average will catch up over the next two years, keeping inflation elevated. Apart from rents, items that households have to buy, including food and fuel, showed much bigger jumps. Gasoline is up by nearly 50% and food by more than 10%. The sanctions-driven oil shortage compounded a supply squeeze that began as soon as the Biden administration took office and stopped selling oil exploration leases for federal lands. Beholden to its progressive, environmentally-woke constituency, the White House discouraged traditional hydrocarbon development, reducing US domestic oil supply by around 20% from the January 2020 peak. Shrinking investment in hydrocarbons is the most pronounced feature of a deteriorating American investment profile. In real dollars, orders for industrial machinery from American manufacturers are roughly 70% below the peak registered 22 years ago in 2000, and about 30% below the level of 2007. Even orders for electrical machinery (including computers) have fallen by about 10% since the historic peak. US inflation is first of all a supply-side problem: There isn’t enough industrial or mining capacity to meet the tsunami of demand unleashed by the $6 trillion in federal stimulus paid out during the Covid epidemic. Secondarily, US inflation is a byproduct of a foreign policy gone pear-shaped. The Biden administration set out to crush the Russian economy. Russia is hurting, but so are Europe and the United States, as well as most of the developing world. The Ukraine war and Western sanctions produced a spike in energy and food prices that reduces the real incomes of Western consumers and pushes many of the world’s poorest into actual starvation. One of the best early-warning signals for future inflation is the Philadelphia Federal Reserve’s survey of non-manufacturing business. As of the end of May, a record 73% of respondents reported higher input costs. So far, Washington’s only response has been to encourage the Federal Reserve to raise interest rates. That won’t help, as I argued in this space on April 8, 2022. The problem is lack of investment. Higher rates simply increase the cost of investment. Eventually, higher rates might produce a recession, and recessions are deflationary. In the long term, though, that will only make the supply squeeze worse, because recessions also crush capital investment. Follow David P. Goldman on Twitter at @davidpgoldman

Perfect economic storm buffeting Biden

Rarely in political events does punishment follow crime so quickly. Washington’s foreign and domestic policy blunders combined to produce the worst drop in real paychecks on record as well as the least public support for presidential economic policy.

Friday’s report that consumer prices rose by 8.6% year-on-year as of June means a drop in inflation-adjusted weekly earnings of nearly 4%, worse than the depths of the 2008-2009 Great Recession. Taking into account underreported inflation in shelter, the actual inflation rate is closer to 11%, and the real drop in earnings is about 7%.

That implies a political implosion for the Biden administration, which faces an 83% disapproval rating for its economic performance. By contrast, Jimmy Carter at the peak of the Great Inflation of the 1970s had a 78% negative rating for economic performance.

Inflation was already roaring in February when oil traded at $88 a barrel, before US sanctions on Russian oil raised the price paid by US and European consumers. Russia continues to export oil to India, China and others at discounts of more than $30 a barrel, that is, at roughly the prevailing price before the Ukraine war.

The sanctions didn’t slow Russia, but they clobbered Western consumers.

Private surveys by Zillow and Apartmentlist.com show rental inflation running at around 16% year-on-year, and at an annualized rate of 15% during May. The US government says that shelter inflation is just 5.5% over the past year. The private surveys reflect new leases rather than the average paid by renters, but the average will catch up over the next two years, keeping inflation elevated.

Apart from rents, items that households have to buy, including food and fuel, showed much bigger jumps. Gasoline is up by nearly 50% and food by more than 10%.

The sanctions-driven oil shortage compounded a supply squeeze that began as soon as the Biden administration took office and stopped selling oil exploration leases for federal lands. Beholden to its progressive, environmentally-woke constituency, the White House discouraged traditional hydrocarbon development, reducing US domestic oil supply by around 20% from the January 2020 peak.

Shrinking investment in hydrocarbons is the most pronounced feature of a deteriorating American investment profile.

In real dollars, orders for industrial machinery from American manufacturers are roughly 70% below the peak registered 22 years ago in 2000, and about 30% below the level of 2007. Even orders for electrical machinery (including computers) have fallen by about 10% since the historic peak.

US inflation is first of all a supply-side problem: There isn’t enough industrial or mining capacity to meet the tsunami of demand unleashed by the $6 trillion in federal stimulus paid out during the Covid epidemic.

Secondarily, US inflation is a byproduct of a foreign policy gone pear-shaped. The Biden administration set out to crush the Russian economy. Russia is hurting, but so are Europe and the United States, as well as most of the developing world.

The Ukraine war and Western sanctions produced a spike in energy and food prices that reduces the real incomes of Western consumers and pushes many of the world’s poorest into actual starvation.

One of the best early-warning signals for future inflation is the Philadelphia Federal Reserve’s survey of non-manufacturing business. As of the end of May, a record 73% of respondents reported higher input costs.

So far, Washington’s only response has been to encourage the Federal Reserve to raise interest rates. That won’t help, as I argued in this space on April 8, 2022. The problem is lack of investment. Higher rates simply increase the cost of investment.

Eventually, higher rates might produce a recession, and recessions are deflationary. In the long term, though, that will only make the supply squeeze worse, because recessions also crush capital investment.

Follow David P. Goldman on Twitter at @davidpgoldman