Three Data Items today:
#1: We keep hearing that stagflation is a looming threat for the US economy, so let’s dredge up the old “Misery Index” from the economic history books and see what it has to say. The calculation here is simple enough: add the unemployment rate to CPI headline inflation and you get a measure of how “miserable” the US consumer feels at any point in time. The former reflects the potential for a “stag”nant American economy. The latter is, of course, the “flation” in “stagflation”.
The chart below shows the Misery Index from 1960 – present. Three observations:
- As noted, its all-time high was in May 1980 at 21.9, with inflation at 14.4 percent and unemployment at 7.5 percent.
- The Great Recession saw the index get to 12.8, although that was almost entirely due to unemployment (9.0 pct) rather than inflation (3.8 pct).
- The current Misery Index reading is 10.5, due to almost equal inflation (5.3 pct) and unemployment (5.2 pct) readings.
The way we read this chart, the most important thing about consumer “misery” in terms of its effect on the US economy is simply how long “bad” or “good” readings last. Protracted periods of high misery (+12.5 on the index) like the 1970s correlate with slow economic growth. When misery is low (index below 10, such as 1993 – 2008 or 2015 – 2020) growth is generally stronger. With the Misery Index at 10.5 currently, we are better off than during the Great Recession but certainly need to see it decline in coming months.
Takeaway: as with virtually every other economic indicator, the direction of the Misery Index matters more than the level, and we expect it will be lower by the end of the year because unemployment will decline and (worst case) inflation will remain unchanged. This should take some of the punch out of the stagflation argument. On top of that, the chart above is a good reminder that stagflation is only truly damaging when it is deeply structural (i.e., the 1970s) rather than temporary/cyclical (1990, 2010 – 2011).
#2: The latest iteration of what we call “the most important chart to US stock prices” is a bit troubling. It is FactSet’s summary of Wall Street analysts’ aggregate S&P 500 earnings for 2021 (bottom line in the graph below) and 2022 (top line):
As you can see, the 2021 (bottom) line has flattened out in the last 2 weeks. As of September 3rd, analysts’ estimates bubbled up to $201.48/share for the S&P 500. As of Friday (the 10th), that aggregate estimate was essentially unchanged at $201.53 (up only 0.02 percent). On the plus side, 2022 estimates are still rising; last week they were $219.47/share; this week they are $219.83/share (+0.2 pct).
How concerned should we be about this flatlining of 2021 estimates? Over the next few weeks, we think it will certainly cause incremental US equity volatility because it only reinforces the slowdown narrative we’re seeing in the economic data. Once we get into earnings season in October, however, companies should still be able to handily beat estimates.
This FactSet chart explains that longer-term optimism. S&P 500 earnings were $52.80/share in Q2 2021, but analysts’ expectations for Q3 and Q4 are lower ($49.23/share and $51.23/share, respectively). Even if the US economy doesn’t grow as quickly in the second half of 2021 as the first, we find it very hard to believe that corporate earnings power is set to decline.
Takeaway: while Q3 2021 earnings expectations have stagnated (and hence 2021 estimates), there is still enough room between Q2’s actual results and forward expectations to believe US large cap earnings power remains higher than consensus/market expectations. That won’t necessarily help current market sentiment, and we expect September to be volatile. It does, however, give us confidence that the September 2nd level on the S&P 500 (4,537) was not the last new high for 2021.
#3: The latest Atlanta Fed GDPNow reading for US Q3 GDP growth is stable at +3.7 percent despite the disappointing August Jobs Report. As the chart below shows, the model’s estimate is both well below what human economists are looking for and both lines reflect a slowdown through the quarter.
Takeaway: last week we highlighted to you that the NY Fed had stopped releasing the results of its GDP model and we worried that was a sign that US Q3 economic growth might have turned negative. The Atlanta Fed model has been generally more accurate than NY’s, so seeing its Q3 readout remain positive and stable to the prior week is good news.
Atlanta Fed GDPNow: https://www.atlantafed.org/cqer/research/gdpnow