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Stagflation Warning: Atlanta Fed GDP Estimate at 0.5%

Summary:
As governments shut down the economy in response to COVID-19 and the Federal Reserve put money printing into hyperdrive, we warned that it was a recipe for stagflation. Today, it looks like stagnation is here.Stagflation is an economic environment with rapidly rising prices, a weak labor market, and low GDP growth. It’s looking more and more like we have all three elements.We’ve primarily focused on the inflationary aspect of stagflation. There is no denying that prices are rising rapidly. The CPI came in hotter than expected again in September. We’re looking at a 6% inflation rate even using the government numbers that understate the true extent of rising prices.But what about economic growth?It is clearly slowing down as well.We’ve gotten hints at this in the last two jobs reports.

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As governments shut down the economy in response to COVID-19 and the Federal Reserve put money printing into hyperdrive, we warned that it was a recipe for stagflation. Today, it looks like stagnation is here.

Stagflation is an economic environment with rapidly rising prices, a weak labor market, and low GDP growth. It’s looking more and more like we have all three elements.

We’ve primarily focused on the inflationary aspect of stagflation. There is no denying that prices are rising rapidly. The CPI came in hotter than expected again in September. We’re looking at a 6% inflation rate even using the government numbers that understate the true extent of rising prices.

But what about economic growth?

It is clearly slowing down as well.

We’ve gotten hints at this in the last two jobs reports. Job growth in both August and September came in far below expectations. The September Labor Department report led Peter Schiff to declare “stagflation is here.”

A weakening dollar with rising consumer prices, rising bond yields and weak economic data – that spells stagflation. I mean, stagflation is here.”

Meanwhile, the Atlanta Fed continues to ratchet down its estimates for economic growth. According to the latest data, “the GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 0.5% on October 19, down from 1.2% on October 15.”

Two months ago, the Atlanta Fed was estimating 6% growth, and back in May, it was 14%.

GDP of 0.5% is getting dangerously close to going negative. That means recession.

Even if we’re not on the cusp of a recession — as the GDP estimate suggests — it’s crystal clear that economic growth is slowing.

The Atlanta Fed said, “Nowcasts of third-quarter real personal consumption expenditures growth and third-quarter real gross private domestic investment growth decreased from 0.9 percent and 10.6 percent, respectively, to 0.4 percent and 8.4 percent, respectively.”

In other words, American consumers are slowing down their stimulus-fueled spending binge and inflation is eating away whatever wage growth they might be seeing. Zero Hedge summed up the current economic situation nicely.

In short, everything is slowing and it is the consumer – that 70% driver of GDP growth – that may be about to hit reverse.”

This is why I said the Federal Reserve is going to have to pick its poison in the very near future. It can tighten monetary policy to fight inflation, which clearly isn’t “transitory.” But doing so would collapse an economy that is clearly already laboring. Stimulus is the only thing pushing the economy along. It looks like the American consumer needs more stimulus, not less. Pulling out the stimulus props will collapse the entire thing.

But continuing this extraordinarily loose monetary policy will add more gasoline to the inflationary fire. At some point, the central bank will risk hyperinflation if it continues to print money with no restraint.

Things are going to get very interesting in the next year.

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