Stagflation?

There’s a whiff of stagflation in the air. To be sure, it’s still much too early to say that stagflation, the scourge of Jimmy Carter’s presidency, is making a comeback. But have you noticed the latest three-month data points for economic growth and inflation?

The Commerce Department reported on May 31 that gross domestic product (GDP) for the first quarter limped along at a 0.6 percent annual rate. In the unlikely event that such a pace proceeds apace for a couple more quarters, such a trend would probably qualify as a “growth recession.” Regarding inflation, the Labor Department reported Friday that the Consumer Price Index for Urban Consumers (CPI-U) has increased at a 7 percent compound annual rate during the three months ending in May. Compared to a 2.5 percent increase for all of 2006, the CPI-U has been rising at an annual rate of 5.5 percent during the first five months of 2007. The CPI index used to calculate real (i.e., inflation-adjusted) wages has increased at an annual rate of 8.5 percent for the latest three months. And the Producer Price Index for finished goods, which measures price changes at the wholesale level, has galloped ahead at an annual rate of 10 percent during the last three months.

The acceleration in inflation this year has been clobbering average real wages of nonsupervisory and production workers, who comprise 80 percent of the private-sector work force. Their wages have been falling at an annual rate of 2.9 percent in 2007. Since the current economic expansion began in November 2001 (five and a half years ago), average real wages for these workers have increased a total of 0.6 percent, having risen by an average annual rate of one-tenth of 1 percent. Meanwhile, worker productivity from the end of 2001 through the first quarter of 2007 has increased by more than 14 percent, averaging 2.5 percent a year. There is a huge disconnect here. During the expansion so far, labor productivity has increased by 2.5 percent per year while average real wages for 80 percent of the private work force have been growing at 0.1 percent per year.

In fact, average real wages for this cohort are now lower than they were in August 2003. That is the month the Bush administration has selected to highlight the wonders of the labor market since then. According to the Bush administration, the labor market and the economy entered (and has remained in) a period of historic robustness since August 2003. Like clockwork, on the first Friday of every month within hours of the 8:30 a.m. release of the Labor Department’s monthly employment report, the White House’s Web site lights up with a celebratory press release proclaiming that the U.S. economy has created X-millions of jobs since August 2003. On June 1, the first Friday of this month, the White House dutifully reported: “Since August 2003, more than 8 million jobs have been created.” Two salient facts go unmentioned. First, there is never any acknowledgement that average real wages for 80 percent of private employees are lower than they were in August 2003, as they are today. Second, while the creation of 8 million jobs since August 2003 sounds like a bunch, it actually reflects a monthly average (178,000) that is 75 percent of the monthly average (237,000) achieved throughout the 96 months of the Clinton administration.

Average real wages for nonsupervisory workers aren’t the income levels that are stagnant or declining. For the 42.2 million women 25 years and older who work full time, median real weekly earnings were unchanged in 2007’s first quarter compared to August 2003 and were down compared to the first quarter of 2002 (five years ago). For the 53 million men 25 years and older working full time, median real weekly earnings were not only below their level of August 2003; these median real earnings were less than they were when Bill Clinton left the White House more than six years ago. At the median level, half the workers earn more and half earn less. Meanwhile, real median household income, which had declined during the first four years of the Bush administration after rising six consecutive years (1994-99) in the Clinton administration, finally increased in 2005 (the latest year available), but it still was nearly $1,300 (2.7 percent) below the 2000 level.

Perhaps these data partly explain why President Bush’s approval rating in the recent Wall Street Journal/NBC News poll plunged to 29 percent, its lowest level ever, while 66 percent of Americans disapproved of his performance.