Wednesday, 18 November 2020 20:57

Reggie Middleton's U.S. Stagflation Analysis Featured

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Stagflation is a combination of numerous economic conditions: slow economic growth, high unemployment, and high levels of inflation, i.e. it describes an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. Lain Macleod first used the term stagflation in 1965 before that stagflation was long believed to be impossible by the economist.

The term is later used to describe the recessionary period in the 1970s following the oil crisis when the U.S. underwent a recession that saw five quarters of negative GDP growth. The U.S. inflation rate hit double digits in 1974; unemployment hit 9% by May 1975.

Stagflation is often caused by supply-side shocks which cause an unprecedented increase in costs or disruption to production. This results in a higher inflation rate and lower GDP. Stagflation may also occur with a decline in traditional industries leading to rising structural unemployment and lower output. 

The outbreak of COVID-19 led the historically strong job market of the U.S to a record level of unemployment. Imposed restrictions and shutdowns of economic activities resulted in negative GDP during the first and second quarter of 2020. The Federal Reserve made an emergency rate cut in the federal funds rate which paused hiking in inflation.

However, the emergency cut made by the Federal Reserve has also exposed the risks associated with the policies as the economy begins to reopen. Many analysts expected that, backed by low rates, businesses and consumers may spend aggressively after being quarantined for a while - pushing inflation upward. At the same time, unemployment remains high, and likely growth negative, resulting in a material chance of pushing the U.S. economy into stagflation.

Let us look at the key factors which will tell us if the predictions made are correct or not.

Gross Domestic Product (GDP)

According to the "advance" estimate by the Bureau of Economic Analysis, U.S. the real gross domestic product (GDP) in the U.S. contracted 2.91% in the third quarter of 2020 over the same quarter of the previous year as efforts continued to resume activities and reopen businesses that were postponed or restricted due to COVID-19.

Figure1: Official GDP Reporting vs. Alternate ShadowStats Estimates (Y-o-Y Real Growth)


The U.S. economy suffered its steepest downturn in the second quarter, 2020, highlighting the effect of the pandemic that disrupted businesses across the country and left millions of Americans unemployed.

Gross domestic product shrank by 9.0% in the second quarter of 2020 over the same quarter of 2019. The main reasons for the shrinking GDP include lockdown measures issued in March and April, and the pandemic assistance program of the government, to assist households and businesses.

This was the biggest ever contraction, pushing the U.S. economy officially into a recession as the coronavirus pandemic forced many businesses including restaurants, cafes, stores and factories to close and people to stay at home, hurting consumer and business spending.

However, the GDP numbers by the BEA, include numerous adjustments allowing room to present a more positive gloomy picture of the economy.

If we are to believe, a site that attempts to recalculate GDP as it was historically configured, states that GDP would actually have come down to -12.96% and -6.74%, respectively, in the second and third quarter in 2020 - if calculated by historical methods, resembling a materially worse situation than estimated.

Balance of Payments

According to the latest data published on 4th November by the U.S. Census Bureau and the U.S. Bureau of Economic Analysis, the U.S. goods and services deficit fell to US$63.9 billion in September decreased from US$67.0 billion in August (revised) as exports increased more than imports.


Exports of goods and services increased US$4.4 billion, or 2.6%, in September to US$176.4 billion. Exports of goods increased by US$3.7 billion, and exports of services increased by US$0.7 billion.

Figure2: Exports (in US$ billion) Seasonally Adjusted (by Commodity/Service)Source:

The increase in exports of goods are mainly due to the increases in foods, feeds, and beverages (US$1.6 billion) and in capital goods (US$1.4 billion).

The increase in export of services is a result of an increase in transportation activities (US$0.2 billion), in travel (US$0.1 billion), in financial services (US$0.1 billion), and other business services (US$0.1 billion).


Imports of goods and services increased by US$1.2 billion, or 0.5%, in September to US$240.2 billion. Imports of goods increased by US$0.6 billion and, imports of services increased by US$0.6 billion.

Figure3: Imports (in US$ billion) Seasonally Adjusted (by Commodity/Service)


The increase in imports of goods is mainly due to the increasing demand in automotive vehicles, parts, and engines (US$3.2 billion) and capital goods (US$0.8 billion).

The increase in imports of services is a reflection of the increase in travel (US$0.3 billion) and transport (US$0.2 billion), which was halted temporarily, due to COVID-19.

However, both export and import are yet to reach the level of the pre-pandemic period, and the current rise in COVID-19 cases can drag trade downward, indicating a lower demand in the economy.

Consumer Price Index (CPI)

Consumer Price Index (CPI) measures the average change over a time in the prices paid by urban consumers for a basket of consumer goods and services.

Figure4: Monthly CPI for All Urban Consumers - Seasonally Adjusted, (% Change)


According to the U.S. Bureau of Labor Statistics, the CPI-U became negative in March and April of 2020 with declined demands due to imposed lockdown to avoid the spike in cases of COVID-19. During May 2020, the government started loosening and lifting the restrictions which positively drove the CPI-U and increased it by 0.6% in June and July 2020. All items index increased by 1.4% over the last 12 months before the seasonal adjustments.

When substituting BLS numbers with that of Shadowstats’, the inflation figures are different and much higher. The ShadowStats provides alternate inflation data that uses the 1980 CPI methodology. This is because of the methodological shifts in government reporting, which have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living and towards a core inflation index stripped of the several volatile, yet necessary cost of living price inputs. Reference Shadowstats No. 515—Public Comment On Inflation Measurement And The Chained-Cpi(C-CPI) for more information.

Figure5: Consumer inflation – BLS Vs. ShadowStats (Not Seasonally Adjusted) (% Change) (Index 1980= 100.0)


Source:, Shadow Government Statistics

As per the U.S. Bureau of Labor Statistics, the October 2020 Consumer Price Index (CPI-U) gained 0.04%, having gained 0.20% in September, up by 1.18% year-to-year, versus 1.37% in September.

The October 2020 ShadowStats Alternate CPI (1980 Base) rose by 8.9% year-to-year, slowing versus 9.1% in September and 9.0% in August. The ShadowStats Alternate CPI estimate restates current headline inflation to reverse the government's inflation-reducing gimmicks of recent decades, which were claimed to explicitly designed to reduce/understate COLAs (cost of living adjustments), used for products such as social security, annuities, and other products very heavily used by wage earning consumers and savers.

This apparent “theft” from wage earners and savers can be seen to easily be the source of the rise populism in the US, and the concentrated, yet staunch following of political personalities such as Donald Trump. These potential fire starters of populism can be seen in both the adjusted inflation figures, and the figures of the US unemployment rate.

Unemployment Rate

The outbreak of COVID-19 has severely affected the U.S. employment market. In January 2020 the unemployment rate in the U.S. was 3.6%, however, in April 2020; the U.S. recorded an unemployment rate of 14.7%, the highest and the most massive over-the-month surge in the history of the data (available back to January 1948).

The total unemployed persons in the U.S. rose by 15.9 million to 23.1 million in April 2020. However, with the Federal governments' efforts and continued resumption of economic activities, the unemployment rate has started to decline and reached 7.9% in September 2020 with the number of unemployed persons dropping to 12.6 million.

According to the Bureau of Labor Statistics, the non-farm payroll employment has risen by 0.66 million in September 2020. A significant number of job was generated in leisure and hospitality, retail trade, healthcare and social assistance and professional and business services sectors. Employment in the government sector has declined over the month, particularly in state and local government education.

Figure6: Monthly Unemployment Rate, Not Seasonally Adjusted (% Change)


Both the measures of unemployment – the unemployment rate and the number of unemployed persons, have declined for the five consecutive months but are higher than in February, by 4.4% points and 6.8 million, respectively.

According to Shadow Government Statistics, the actual scenario is much different. SGS claims BLS. BLS is understating the unemployment from the last eight months by misclassifying some of the unemployed persons as employed in the household survey. While calculating, an estimate of 562,000 persons were considered employed who more properly should have been counted as unemployed. This has reduced the U3 unemployment rate of October 2020 to 6.88% from September 2020 level of 7.86%. The unemployment rate of the U6 category has declined to 12.19% in October 2020 from 12.84% in September 2020.

Figure7: Unemployment Rate - BLS vs ShadowStats-Alternate (Seasonally Adjusted)

Source:, Shadow Government Statistics

The Y6 unemployment category includes short-term discouraged workers and workers employed part-time for economic reasons. The overall unemployment rate, including long-term discouraged/displaced workers as per ShadowStats Alternate measure, was 26.3% for October 2020, down from 26.9% in September 2020.

Figure7: Unemployment Rate U-3 vs ShadowStats-Alternate Unemployment Rate (Seasonally Adjusted) (Jan-oct, 2020) 


Source:, Shadow Government Statistics


Currency De-valuation

The dollar started dramatically weakening at the onset of the spike in the coronavirus cases in March, and its downward slide was reinforced when Fed Chairman Jerome Powell announced a new policy of average interest rate targeting. That policy would allow the Fed to keep interest rates at zero, even if inflation temporarily rises above its 2% target, which means a further weakening of the dollar.

The three most important aspects behind the weakening USD are the ultra-loose monetary policy adopted by the U.S. Fed, the historically unprecedented increase in federal, state, and municipal debt and the weakening U.S. economy. It is further expected that the interest rates will continue to be near zero for the foreseeable future in the U.S. A rise from this point would make US debt service untenable, but despite record debt in both nominal and GDP adjusted terms (near record), debt service is cheaper now than when at lower levels.

Figure8: Federal Reserve Board vs ShadowStats U.S. Dollar Exchange Rate Indices (Not Seasonally Adjusted, Level and 

Y-o-Y % Change)


Usually, falling currency rates indicate more inflation, aided with higher unemployment and lower GDP growth thereby, making the economic situation difficult.

What the USD is witnessing today, might just be the beginning of a broader structural downtrend, driven partially by the steady recovery of other countries post Coronavirus relative to the US, particularly Asia and Africa, but Europe as well.

The SGS Financial-Weighted Dollar Index reflects a composite value of the foreign-exchange-weighted U.S. dollar, weighted by the proportionate trading volume of the USD versus the six highest-volume currencies: EUR, JPY, GBP, CHF, AUD, CAD.

On the other hand, the FRB Trade-Weighted Dollar is the Major Currency Index published by the Federal Reserve, with the USD weighted by respective merchandise trade volume against the same currencies.

Over the past seven months, the U.S. dollar has continued to lose value against other currencies and the euro in particular. As can be seen in the chart, the value of the dollar in August has fallen to -4.53% as per ShadowStats and -3.95% as per the Federal Reserve Board, the lowest in all of 2020.

What the weaker dollar does is that it makes the economy slower than it otherwise would, causing an economic recovery more challenging for the U.S. with, the investors tending to invest elsewhere. Of course, it also makes exports cheaper on a relative basis, but with demand muted to the extent that it has been, this benefit can be easily overstated.

The continued growth of Coronavirus cases in the U.S. is slowing the speed of the economic recovery while apparently, Eurozone and Asia are doing relatively better – save certain European hot spots.

Money Supply

Increase in money supply lowers the interest rates in the economy, reducing the price for borrowing money with increased consumption and lending. Usually, in the short-run, higher rates of consumption, lending and borrowing increase the total output of an economy with a rise in inflation.

As can be seen from Figure 9, the excessive printing of money (from M1 to the full monetary base) bears a tight correlation with the skyrocketing stock market - as liquidity drives nominal prices ever higher. This is only interrupted by the sharp contraction in Q1 when the reality of the bursting "everything bubbles" through COVID eventually hit.

Figure 9: Money Supply Vs. Stock Market (indexed at Jan 2016 = 100)



The COVID-19 pandemic has replaced a historically strong U.S. job market with record levels of unemployment. The unemployment rate in April rose to 14.7%, four times the rate in January 2020. At the same time, second-quarter GDP numbers plummeted to an all-time low of 31.7% on an annualized basis.

If we are to believe the data provided by the government of the U.S., so far, there is no sign of inflation. If anything, prices have fallen during the pandemic. Both exports and imports remained low during the pandemic, reflecting the impact of COVID-19, as many businesses continued to cease operations entirely or operate at limited capacity, and the movement of travellers across borders remained restricted. Adding to the worries is the depreciation in the value of the USD.

However, the reopening of economic activities witnessed a positive uptick. The significant rebound in GDP in the third quarter seemed promising, yet the spread of the novel coronavirus in the country over the summer has put growth at significant risk. Many pundits view the surge in stock prices as a powerful sign that many in the market expect a healthy recovery. We see it as the inevitable results of ZIRP (zero interest rate policy), QE (quantitative easing) and the largest fiscal and monetary stimulus packages in the history of the union. Keep in mind that these share prices have been spiking as earnings stagnate and a record number of companies mire in mediocre operating results, slowing businesses and insolvency.  Unemployment has soared since the pandemic hit the U.S. economy but is slowly coming down with 7.9% in September, the lowest post-pandemic number, as inflation also remains low at 0.2%.

In addition, the U.S. Federal government acted with unprecedented scale, speed, and coordination, surpassing past efforts to mitigate the crisis caused by the pandemic and to bring back the economy on track. By mid-August, the federal government had spent more than US$3 trillion, to keep hundreds of thousands of businesses and over 150 million Americans from the brink of economic failure, preventing the recession from turning into a depression. Also, the Fed spent US$ 2 trillion on securities between March – June and June to preserve the economy.

But, the current set of data provided by Shadowstats, shows high retail inflation, high rate of unemployment, falling currency rates, along with a contraction in GDP. This is analogous to the phenomenon of stagflation. The current situation has emerged mainly due to the impact of the pandemic and is more cyclical in nature. There is one major exception to this cyclicality, though. It is now not only mandated, but from efficacy perspective, highly desirable to have employees work from home when possible. This effectively gutted the large urban commercial centres in the country’s metropolitan clusters – leaving vast swaths of office centres with 65% to 90% vacancy rates, which daisy chain into the surrounding ecosystems that rely on the commercial real estate activity, i.e., restaurants, retail stores, office support infrastructure, public transportation, and the cities’ commercial tax base. This is essentially a structural and permanent (or at best, semi-permanent) change in the demographic make-up in major cities. The CMBS underpinning these office parks are cracking now as we pen this. Reference With Every Hedge Fund and Their Mother Crowding Into the Big Short 3.0, Remember Who Warned You 1st, in 2007 and 2020.

The main factors leading to supply-side disruptions are local lockdowns, particularly for perishable agricultural products, which have contributed extensively to the rise in inflation of certain food items.

At present, supply disruptions caused by localized lockdowns and changes necessitated by social distancing, are overshadowing faltering demand, which is raising the likelihood of a stagflation-like scenario. "Nevertheless, if the situation presented by these data trends continue in the medium term, the economy is at risk of entering into stagflation."

The idea that the U.S. economy has fallen into the trap of Stagnation is still a minority view and at this point fears about the inflation side of it seem to be subsiding. However, the stagnation half of it seems a real danger only if a vaccine is delayed or the damage from the coronavirus pandemic extends for longer than is anticipated.

It is our opinion that this second branch of thought is overly optimistic, for a vaccine, even if produced timely, must be distributed at an unprecedented rate and volume and at an unprecedented cost (nigh zero). In addition, real-world safety and efficacy issues loom, which may also mire the speed with which the vaccine can be used, borne from the speed at which it was developed and tested.

Add to all of this, the rapid rise of the infection rate across the western world and the unprecedented re-closing of many economies in Europe and the states foreshadows a much more stagnant GDP growth forecast than pundits are espousing.

Currently, the infection rates in many U.S. states and several major EU countries and the U.K. and India are at the highest they've ever been, eclipsing the rates that have caused the original shutdowns that drove GDP negative in the first place.

Although the mortality rate has materially lessened, the increase in overall infections has increased the net deaths relative to the pre-lockdown peaks, threatening once again to overload healthcare systems across much of the western hemisphere, posing a threat of another economic downfall.

Read 7738 times Last modified on Monday, 09 January 2023 09:11