But adjusted for inflation, real wages have fallen every month since, bringing the cumulative decline to 3.2%. Even nominal wage growth is slipping, with the annual growth rate slowing from 5.6% in March to 5.2% in July. When other sources of personal income are included — employee benefits, owner income, rent, interest, dividends, and benefits — and income taxes are deducted, disposable personal income increased 6.8% year over year in the second quarter but fell 0. 6% for inflation.
Those who believe consumer spending is resilient confuse inflation’s overlays with the real economy. Since March 2021, retail sales have increased by 6.9% in nominal terms but have fallen by 4.1% in real terms.
Denial of the ravages of inflation was also widespread in the late 1960s and 1970s, when huge federal spending on the Vietnam War and the Great Society programs pushed the economy into double-digit inflation. Despite the Johnson administration’s beliefs, the economy did not have the labor supply or the industrial capacity to produce both arsenals (military spending) and butter (civilian products).
Corporate costs soared as CEOs felt an obligation to at least keep employees up to speed with rising prices. So not only did nominal wages rise, but real wages as well. At the same time, the depreciation of property, plant and equipment based on historical acquisition costs lagged far behind the replacement funds. In addition, inflation led to taxable inventory gains. The dollar value of the reserves skyrocketed, although the physical size of the reserves did not change.
At the time, I asked our corporate clients to look at their company results in real terms to see how much damage inflation had done. The general response was that Wall Street doesn’t care about real results, so why should they? And while the Dow Jones Industrial Average hovered around 1,000 in nominal terms from the late 1960s to the late 1970s, it plummeted 73.1% in real terms from January 1966 to July 1982.
Despite today’s high inflation, some shareholders are also in a state of denial. On August 16, Walmart Inc., the nation’s largest retailer by volume, reported sales grew 8.4% in the quarter ended July 31 from a year earlier, less than the 8.5% increase in the CPI. The retailer’s grocery sales volume declined during the quarter and operating income declined 6.8% on higher discounts and more low-margin groceries sold. Still, investors bid Walmart shares up 5.1% on the day of this announcement.
On August 23, Macy’s Inc., the largest US department store chain, lowered its forecasts for this year due to the economic slowdown, slowing consumer spending and price cuts and promotions to shed excess inventory. Sales in stores open for at least a year fell 1.5% year over year in the second quarter. Still, Macy’s shares closed 3.8% higher on the day.
Today’s high inflation is clearly hurting corporate results. From the second quarter of 2021 to the second quarter of this year, the gross value added of corporate business (actually corporate sales) increased by 12.7% in nominal terms, but only by 5.1% in real terms. After-tax corporate earnings underperformed, rising 7.4%, but just 0.1% in inflation-adjusted terms.
Inflation, while peaking, will no doubt be slowing down. So the 5% increase in S&P 500 earnings that Wall Street analysts are forecasting for 2022, as reported by S&P Global, will amount to a real decline. Investors will no doubt see through the veil of inflation and focus on the growing weakness in real corporate earnings and earnings. This could be partly behind the recent renewed sell-off in equities. My earlier forecast of an overall S&P 500 decline of 40% from its early January peak is still relevant.
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This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Gary Shilling is President of A. Gary Shilling & Co., a consulting firm. He is most recently the author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation and may be involved in the areas he writes about.
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