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How we get to 'stag'
So what's the "stag" part of stagflation look like as we begin 2008?The economy seems to be decelerating rapidly:
- According to the latest data, released Dec. 27 but dating to the end of October, home prices are falling at a record rate. The S&P/Case-Shiller index of home prices in 10 major metropolitan areas dropped 6.7% from October 2006. That's a record year-to-year decline, beating the old record of 6.3%, set in April 1991.
- That decline is feeding into a whopping increase in credit card delinquencies. The dollar amount of credit card debt at least 30 days late jumped 26%, to $17.3 billion, in October 2007 from the same month of 2006, according to an Associated Press study of 325 million individual accounts held by the 17 largest credit card trusts.
- Retail sales in the just-concluded Christmas shopping season appeared weaker than projected, with growth in same-store sales running below estimates of 2.5%, according to the International Council of Shopping Centers. All this is starting to hit the real economy where it counts: in the unemployment numbers. Initial claims for unemployment, a good gauge for what's going on in the job market, rose to 350,000 in the week that ended Dec. 22. That left the four-week moving average for initial claims at 343,000. That's getting worryingly close to the 360,000 level in the four-week moving average that has accompanied recessions in 1990 (362,000) and 2001 (373,000).
But as bad as this news is, it doesn't add up to the "stag" in "stagflation."
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What was so excruciating about the stagflation of the 1970s was the duration of the "stag." Slow or negative growth went on for quarter after quarter. After growing at a 4.7% real rate in the second quarter of 1973, real economic growth turned negative, dropping by 2.1% in the third quarter. The economy then rebounded to a 3.9% real growth rate in the fourth quarter of 1973 before heading into the Dumpster. The economy showed negative 3.4% real growth in the first quarter of 1974, a minor revival to a positive 1.2% growth rate in the second quarter and then three straight negative quarters of 3.8%, 1.6% and 4.7%.
- Talk back: Do you think stagflation is ahead?
No wonder the bear market in stocks of 1973 and 1974 was so painful. Stocks fell 14.7% in 1973 and then 26.5% in 1974.
Right now, no one on Wall Street is looking for a repeat of that extended slump. Growth is supposed to slow in the first half of 2008 and then pick up, leaving growth for 2008 at 2.3%, according to the Federal Reserve. I think that forecast is too optimistic. The slump in 2008 is likely to last for more than just the two quarters Wall Street expects.
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Jubak's Journal: A turnaround for the dollar?The US dollar could turn out to be the big comeback surprise of 2008. One reason: As foreign investors put big money into US companies, those foreign countries are less likely to dump the dollar, MSN Money's Jim Jubak says.
But I still don't expect a recession in 2008 (see "Why the Fed is running scared") and certainly not anything like the negative growth in five out of seven quarters that the economy turned in from mid-1973 to early 1975. (Officially a recession is two consecutive quarters of negative economic growth.)
Not over yet
What could tip us from slow growth -- either the two quarters that Wall Street expects or the three to four that I think is likely (see "Don't count on a 'normal' recession") -- into 1970s-style stagnation?An expansion of the credit crunch from its current victims -- home buyers who can't find a mortgage and homeowners who can't refinance a mortgage -- to corporate borrowers with decent credit ratings. If companies can't raise capital on decent terms, they'll cut spending on new equipment and construction, then eliminate plans for hiring, then cut back on buying anything that's not essential and, finally, fire workers. And then we'll be on the road to something worse than a couple of slow quarters.
Continued: Portfolio suggestions
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