Global Stagflation

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/articles/global-economies-flash-warning-…

**Global Economies Flash Warning of Sharp Slowdown**
**Surveys of purchasing managers point to weakness in manufacturing and services as higher prices hit household spending power**
**By Paul Hannon and Gabriel T. Rubin, The Wall Street Journal, Aug. 23, 2022**

**Business activity in the U.S., Europe and Japan fell in August, according to new surveys, pointing to a sharp slowdown in global economic growth as higher prices weaken consumer demand and the war in Ukraine scrambles supply chains.**

**U.S. companies reported a sharp drop in business activity in August in a broad-based decline led by services companies, though manufacturing slowed as well. High inflation, material shortages, delivery delays and interest-rate rises all weighed on business activity, the S&P Global survey said. ...**

**Businesses in both [manufacturing and services] sectors reported a decline in new orders in the eurozone, which points to weakness in the months to come, while factories reported a buildup in inventories as goods remained unsold....S&P Global’s surveys indicated that private-sector activity in Japan and Australia also declined in August for the first time since a wave of new Covid-19 infections at the start of the year....** [end quote]

The Eurozone is being hit by high fuel prices and restricted volumes due to Russia’s invasion of Ukraine.

The latest data for the U.S. is June 2022. At that point, new orders were rising and inventories, which had been rising sharply, stabilized. Rising inventories are bad for manufacturers since they might have to cut prices to sell, which reduces profits.
https://fred.stlouisfed.org/series/DGORDER
https://fred.stlouisfed.org/series/NEWORDER
https://fred.stlouisfed.org/series/MNFCTRIMNSA

But a lot has changed since June since the increase in interest rates has caused home and vehicle sales to drop.
https://fred.stlouisfed.org/series/EXHOSLUSM495N
https://fred.stlouisfed.org/series/EXHOSLUSM495S
https://fred.stlouisfed.org/series/TOTALSA

Sales of housing and vehicles are important Macro indicators since so many jobs are associated with these sectors.

Investors should be aware of the stock market history during the 1970s stagflation. The Fed raised rates to control inflation but eased when the economy slowed. This easing led to more inflation, rinse and repeat. The stock market had several rounds of recovery but these were followed by plunges. The June to August 2022 stock market recovery may be similar.

https://www.macrotrends.net/2324/sp-500-historical-chart-dat…

China’s economy is also slowing, due to Covid shutdowns and high debt loads.

A global economy is highly interdependent. Global stagflation will not be good for trade or for the stock market.

Wendy

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Investors should be aware of the stock market history during the 1970s stagflation

I appreciate the links to informative trends. However, the 70’s stagflation is nowhere close to where we are in this economy. Remember that Nixon took us off the gold standard and imposed wage/price controls to kick off the 70’s. OPEC’s quadrupling of oil prices in October 1973 didn’t help. The end of the war in Vietnam and a decade of war debt. As the war ended, unemployment went from 3.5% to 6.0% in a year. Nixon resigns, inflation is running at 12%, unemployment is at 8%, this is not what’s going on today.

Unemployment during the Reagan years holds at 7% on average five or six years until Paul Volker crashes the economy with mortgage interest rates running at 13% and unemployment at 10%.
This is not the current state of the economy in the United States.

China will not impose Covid restrictions forever
Mortgage rates of 5.3% were a pipe dream throughout the 70’s and early 80’s
Unemployment is not a factor in the current economy
Much of the current deficit spending has gone into the US economy at home, not a war in Indonesia where we sent 2 million Troops.
The current inflation is energy driven

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OPEC’s quadrupling of oil prices in October 1973 didn’t help

It wasn’t OPEC. The 1973 oil embargo was staged by the ARAB members of OPEC, i.e. AOPEC

During the 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations.

https://history.state.gov/milestones/1969-1976/oil-embargo

The Captain

Venezuela, the country that fathered OPEC, was happy to continue pumping oil.

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Venezuela, the country that fathered OPEC, was happy to continue pumping oil.

The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization.

Venezuela Production in 1973 averaged 3.3 million barrels a day. OPEC in 1973 produced more than half the world’s output of 55 million barrels a day. So, yeah, Venezuela continued to produce 2.5% of the world’s output; which resulted in a third of the US imports.

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It’s funny - as the world recovered from the First World War and the Spanish Flu of 2018, the rebound was the Roaring 20’s - a time of financial exuberance.

At a time when the world should be ready to rebound from the COVID plague, the US from leaving Iraq and Afghanistan and so on, the Russo/Ukraine War, global climate change, challenging times in China and so on have poured water on the recovery.

Jeff

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