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Just Making Do

Today, the Federal Reserve announced that they would continue their open-ended bond-buying program (to the tune of $85 billion per month) in an effort to stimulate economic growth. Since we are well into the third iteration of “quantitative easing” (read: money printing), it’s worth taking a look at the track record so far. It’s not pretty. Today’s ADP Employment Report estimates that the private sector created a mere 119,000 jobs last month, which was below expectations of 150,000 jobs created (which would be only slightly less disappointing). Meanwhile, with GDP growth averaging less than 1.5% over the last two quarters and a real unemployment rate of 13.8%, the government is preparing to change the way it calculates GDP to boost its numbers (adding such things as the capital value of books and movies and counting Research and Development as a “service”). Last quarter, only 38% of S&P 500 companies topped revenue forecasts.

There have also been some interesting price movements of late. If you listen to ol’ Ben, you’ll hear that there’s currently very little in the way of inflation and that the FED is currently doing is best to stimulate some inflation (for reasons known only to Bernanke). However, if you look at the data, you get a slightly different story. If you look at prices from the beginning of the recession to the present, a very interesting pattern emerges. The CPI (minus food and energy prices, as measured by the government) is moving relatively consistently (ever upward, it should be noted), but food and energy are behaving a little differently. Gas prices are all over the map, but they do seem to have settled into a relatively stable pattern, with prices never rising and falling between 110-140% of their 2007 levels. For anyone with a car, that is a fairly significant price increase (at 10% or more), particularly if you’ve had your wages cut. Food prices are following a more consistent upward trajectory, with prices currently about 15% higher than their 2007 levels and rising a good deal faster than the overall CPI (which is about 10% higher than its 2007 level).

This is all very curious. From 2007 to the present, wages and compensation (non-farm) have basically been flat. During the same time period, prices have risen 10%, while food and gas prices have risen much faster. The movement in food and gas prices is particularly significant since such expenses (along with things like housing) are non-optional in the typical family’s budget. So, if gas and food prices (in addition to the prices captured by the CPI) rise faster than wages, the average person is going to see his discretionary income drop every year. This means he has less money for things like vacations, or a new car, or gifts for his friends/family, etc. This all calls into the question the wisdom of the FED’s current policy of relatively significant price increases and its intended policy of really significant price increases. It would explain why GDP growth has been so muted. Essentially, once people are finished paying for groceries, rent, and gas to get to work, they don’t have much money left over for anything else. So, they and the broader economy just amble along.