Will the Recession be Over by Election Day?

The economy is always a yin and yang, with one thing tending to counterbalance another. In the past I have frequently differentiated one such tension between the "Kudlow economy" for the top 20% (actually more like top 5%) which prospered mightily during the Bush/GOP malAdministration, and the "Bonddad economy" of the bottom 80%, which saw little or nothing of the alleged prosperity.
Until late last year, consumption in the Kudlow economy more than balanced the distress in the Bonddad economy. Then, the balance changed.
I am here to deliver a message which I fear will be as welcome as a skunk at a wedding reception: I believe the balance is about to change again, at least briefly, back in favor of the Kudlow economy. Even if you disagree strongly, I hope you take the time to consider the evidence I amass below.

1946! Interest rates, inflation, and war

I'm not a trader, and I don't put much faith in short term charts the likes of which you typically see in financial porn. Longer term charts, however, are more interesting. It is much easier to separate the signal (or trend) from the noise, and the "trend" is a reflection of the economic psychology of the public. Not just that part of the public that invests, but the public who buys houses and has mortgages, buys cars and retail and pays on credit, or even saves in CDs and money market accounts. In short, just about everybody.

Why inflation isn't the problem

With the release of today's January 2008 CPI showing a yearly reading of 4.1%, inflation hawks are certainly out in force in the blogosphere. While I certainly agree that the average American family has faced a vastly increased burden purchasing food, gasoline, and medical care, I do not think it is inflation itself that will be the problem going forward in 2008. Below I explain why.

Below is a graph showing how inflation tends to play out over economic cycles. The blue line is consumer inflation (cpi). The red line is producer inflation (ppi) which is the rate at which costs are increasing to producers. The green line is household debt.

Real Weekly Wages Plunges in January

Real weekly wages plunges in January, down -1.4% yr/yr adding more stress to deeply indebted households

The BLS reported today that average seasonally adjusted weekly wages fell another -0.5% behind consumer price increases in January with wages now able to buy -1.4% less than they did one year ago. Weekly wages fell in four of the past five months since last August. Average real weekly wages are now again lower than they were in January 2002…and in January 1981 when the irresponsible debt and deregulation ideology took power.

wages plunge, comparison of Jan. 07 to Jan 08