CHANGE SIZE

Stagflation Persists-NO END IN VIEW

Posted July 4, 2008

Other Articles

Consumer Spending power, after being sharply curtailed in May by the rising prices and stagnant incomes which characterizes present-day stagnation, rebounded a bit in June but not by enough to offset May’s reduction. With no end in view for stagnation, consumer ability to sustain their current rate of spending ratchets down from month to month.

While consumers, collectively, sense stagflation as a reduction in personal spending power, they are acutely aware that stagflation is rooted in the profound problems that currently plague the nation. When asked in June to name the major problems facing the nation, consumers spontaneously named with greatest frequency: “high cost of energy” 51%; inflation 35% and recession 30%.

To resolve the national problems at the root of stagflation in the long term, consumers turn to the political process. Immediately, to solve the personal problem of living within their shrinking means, consumers reduce spending for food, clothing and other consumables and defer buying houses, cars and other major goods.

The Shapiro Consumer Affordability Index (CBI), which tracks whether consumers feel they can afford to sustain their current level of spending, falls four points from 82 in April to 78 in May – its lowest level since the onset of recession in November. It rebounds from 78 in May to 80 in June, making up only two of the four points lost in the prior month. Stagflation persists with no end in view.

The spike in stagflation between April and May was triggered by a surge in the rate of inflation. The percent of consumers saying prices are higher this month than last jumped from 84% in April to a screaming 90% in May before ticking down to 89% in June. The May inflation spike triggered fear that times were getting worse. Consumers curtailed spending harshly.

In June, it became clear to consumers that they had cut spending too harshly. The percent of consumers reporting they had money left over for savings ticked up from 34% in May to 39% in June, and the percent who expected their savings to increase in the coming year also edged up from 28% in May to 30% in June.

Consumers react to having cash in their pockets by spending freely. In June, fewer consumers cut spending on food, clothing, medical expenses, and other products not usually purchased with borrowed money. But, still wary, consumers continued to conserve cash by deferring active shopping for cars, houses, and other major goods purchased on credit.

The surge in inflation not only affected consumers but damaged businesses, which is likely to depress economic activity and, in turn, depress consumer income.

Stagflation does not affect consumers uniformly. To anticipate behavior, 8Sages develops statistics for five distinct population segments delineated on the basis of how severely the segment is affected by stagflation.

Of the 1,941 consumers interviewed during the four-month period ending June, 19% are classified as being in “Great” shape financially. They report their assets plus income versus their debt and spending obligations have been and will continue to be in balance.

Typically, consumers with finances in Great shape feel affluent, secure, and well able to sustain their current level of spending in the face of stagflation.

The 19% of consumers in Great financial shape include a disproportionate – up to double – their share of consumers actively shopping for major goods. Specifically, this 19% segment of the population includes 38% of consumers actively shopping for cars, 37% of active shoppers for houses, 40% of active furniture shoppers, and 39% of active shoppers for personal computers.

At the other extreme, 14% of consumers report that their finances that are classified as being in “Awful” shape. Typically, these are low-income consumers whose spending is constantly constrained by low incomes rather than by the impact of stagflation. The 14% of the population in Awful financial shape account for a disproportionately low percent of consumers actively shopping for new cars (3%), housing (4%), and furniture ( 5%).

Consumers in Awful financial shape are represented in their proper proportion among active shoppers for used cars (15%); major appliances (15%) – no data on the percent used versus new appliances; carpeting (15%); and personal computers (14%).

Between these extremes is the largest consumer segment, which includes just over a third (35%) of all consumers. For convenience, we refer to these consumers as “Marginal.”

Marginal consumers are somewhat younger than the balance of the population, with incomes in line with the general population. They appear to be under financial pressure not because of low income, but because they are in the process of raising a family.

The 35% of the population classified as Marginal include 36% of active shoppers for housing and 34% of active used car shoppers, but only 26% of shoppers for new cars.

Consumers with Great, Marginal and Awful finances account for 68% of all consumers. The balance of consumers divide between 16% with finances that are “Good” but not Great – whose spending resembles spending by consumers with Great finances – and another set of 16% of consumers whose finances are “Bad” but not Awful. Spending by consumers with Bad finances resembles spending by consumers with Awful finances.

The concentration of buying power among the 35% of the population with Great or Good finances gives substance to the argument of pundits for government programs to bolster the incomes of the wealthy in order to stimulate buying of major goods and help end the recession.

The 65% of the population concentrated in the segments of the population with Marginal, Poor or Bad finances give substance to the argument of pundits who say that, apart from issues of social justice, government programs should bolster the incomes of the mass of the population to stimulate purchases of food, clothing, and other consumable goods as well as some major goods.

View table

ANTICIPATING THE FUTURE

Contemporaneous and repeated views of what is actually happening as it happens provide a basis for continuously making and correcting projections of the future.

8Sages is a unique source of contemporaneous economic statistics. Based on consumer interviews – results of which become available almost immediately once the data are collected – 8Sages statistics present a more current picture of the economy than statistics from government and trade sources. Consumer survey statistics, however, are not as reliable or detailed as statistics gathered by the government or the trade.

To anticipate the future, it is important to utilize the full range of statistics available from consumer surveys and from government and trade sources.

But statistics from whatever source do not bear their interpretation on their faces. To grasp their meaning requires analysis, insight, and inspiration.

To secure a rounded view of what is likely to happen, 8Sages continuously analyzes its own data and data from other sources.

________________________________________________________

Click here to learn the comparasion of estimates of trends in inflation based on survey findings published by Leo J. Shapiro and Associates; University of Michigan; and the National Conference Board – compared with trends based on the Consumer Price Index compiled by the Bureau of Labor statistics, which visits a sample of stores to collects data on prices charged. _________________________________________________________

Reports posted on 8Sages.com include some but not a great deal of what it learns from the analysis of available data. Analysis and exposition of analytic results take time. Including a running account of the analytic findings on 8Sages would delay the release of timely data.

8SAGES.com continues to track the economy and explore the effects of recession and inflation on various segments of the consumer population. Contact 8SAGES.com with questions or with requests for being alerted to new developments.

ALSO SEE PREVIOUS ARTICLES ON THIS TOPIC

Stagflation Now May 25, 2008

Recession Bite – Stagflation Looms Update April 21,2008

Recession Bite – Stagflation Looms March 27, 2008