Where goes the economy is a good question and the way to analyze it is to keep the analysis as simple as possible. Approximately 70% of the U.S. economic output (Gross Domestic Product) is based on personal consumption expenditures. In order for the economy to produce sustainable levels of economic growth above 3% , real income growth must be positive. What is the current situation?
In the three months ending in February, 2011 the annualized consumer inflation rate was 5.6%. That is not a typo. With the general price increases ripping through our economy since February, it is doubtful the inflation rate will be receding. In the past 12 months wages and salaries have increased between 1.7% to 2.0%. We now have a situation where real incomes are declining. There is no way that I know of where you can sustain vibrant economic growth when real personal incomes are declining. This does not mean we will be going into another recession. What it does mean is that the U.S. economy will be experiencing sluggish economic growth more towards the 2% to 2.5% range. This will not be sufficient to bring down significantly our high unemployment level.
Lastly, it will also adversely impact the rate of growth of corporate profits. I expect this to be reflected in stock prices as we get well into the second half of the year.
“A secure future lies in economic growth.”