Published By Janet Gershen-Siegel at June 16th, 2022
Or, everything old is new again. But stagflation 2022 might not look too much like stagflation 1973 – 1974. It may not look like stagflation 1978 – 1979, either. As for how it could affect small businesses, read on.
But wait. Let’s define our terms. And look back on those not-so thrilling days of economic yesteryear.
Per Fortune, stagflation is “a combination of economic stagnation and high inflation, with the added struggle of increased unemployment”.
Investopedia adds, “Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).”
It seems like a paradox. Shouldn’t high inflation only come from significant economic growth? That’s like the old Phillips curve from Economics 101 predicts. How can it go with a recession? It pays to look at stagflation 1970s style.
Put on some Lynyrd Skynyrd and take your hip huggers out of mothballs, it’s time to look at this mid-70s recession. Its cause? For the most part, the OPEC oil embargo, per Fortune. Price levels rose, and there were gas lines. Per-barrel petroleum prices quadrupled. But OPEC didn’t start its embargo in a vacuum.
Government policies started Americans down that road.
Over a year earlier, then-President Nixon took the US off the gold standard. This raised gold prices significantly. And, in late 1973, the United States sent military aid to Israel. This move didn’t endear America to Arab countries.
How did the 1973 – 1975 stagflation oil crisis end? Part was the US taking action. We extended daylight savings time, and lowered highway speed limits. And we created the Strategic Petroleum Reserve. Another part of how stagflation ended was OPEC countries couldn’t agree on how long to continue the embargo.
Lest we forget, the embargo also caused a 1973 stock market crash. This led to the second-longest bear market in US history. The longest? Why, that was the Great Depression, of course.
Time to trade your Lynyrd Skynyrd for the Bee Gees and your hip huggers for designer jeans. Let’s look at the second go-’round for stagflation, from 1978 – 1979.
Part of why stagflation reared its ugly head again in 1978 was due to the Iranian Revolution. In part, its effect on the economy came from loss of oil production. But it also came from decision making on the part of speculators. Having already seen what could happen to fuel prices, many engaged in widespread speculative hoarding. And this led to a second shock which brought with it higher prices.
Other factors hurting the US economy included a fourth quarter 1978 stock market crash. The Dow Jones fell from 897.09 to 792.45, a loss of over 11%. But this time stagflation and gold weren’t linked. Rather, economic decline came from the bond market hitting the skids.
Today, our economic activity is being buffeted about by, among other things, the continuing pandemic. The war in Ukraine isn’t helping matters, either. As a result there are supply chain issues which cause bottlenecks for goods and services. This includes recent shortages of baby formula and computer chips for cars. Sellers could not meet consumer demand in either area. Consumer spending matters less if goods and services aren’t available at any consumer prices.
International trade, in this way, can directly affect our economic cycle.
Former Treasury Secretary Lawrence Summers sounded the alarm in March of 2022. He wrote: “price stability is essential for sustained maximum employment, while overheating the economy leads to stagflation and higher levels of average unemployment through time.”
Summers goes on to note that interest rates have to go up to take a significant bite out of inflation. But the Fed (as do a lot of others) likes the US having a low unemployment rate. Still, letting inflation run wild to lower initial jobless claims will only lead to stagflation 2022.
Summers appears to have changed his tune and is more concerned with inflation currently. He wrote: “over the past 75 years, every time inflation has exceeded 4 percent and unemployment has been below 5 percent, the U.S. economy has gone into recession within two years. Today, inflation is north of 6 percent and unemployment is south of 4 percent.”
Maybe. Per Investopedia, a recession is: “a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline.”
The most recent recession in the US was in 2020. This economic recession came directly from high unemployment due to the pandemic. But that one didn’t even last one calendar quarter.
Maybe, particularly as China is currently struggling with containing Covid. Issues with economic sanctions against Russia aren’t helping matters. The European Union isn’t off the hook—they’re looking at a drop in euro zone economic growth. The culprit? The Ukraine war.
Stock prices go up and down as a matter of course. Does this mean your business should consider price increases? It will likely depend on your industry. If you make something that no one else does, then you may be okay in raising price levels. A competitive space is different. Consumers will make a cost-benefit analysis versus their own personal finance situation. If your consumer prices are too high your company will become vulnerable. So, they may turn to a competitor.
Hence, even as raw materials costs rise, your cost of goods and services produced might have to stay about the same. Otherwise, you wouldn’t be competitive in your market niche.
Yet if industrial production gets more expensive, it will make it harder for small corporations to weather an economic recession.
In a poor economy, business cards and financing can almost become a means of wealth management for companies. They’re helpful as market data on the economy leads to suppliers raising prices. If, say, you wait to buy necessary supplies, changes in the economy could raise costs before you get around to buying. But companies which use this means of paying can hedge their bets by buying now and paying later.
You can fuel your own company’s growth by buying on, say, June 1 at June prices. And then take until September to pay off everything. In particular, it’s a good economic move if you use a card with a 0% APR period. If September costs turn out to be far higher than June’s, it’s an even better move.
Note, of course, that holding a balance will lower PAYDEX and other scores, at least for a short term. This is why I am only saying to carry a balance for a few months at the most. Much like consumers need to pay their bills on time, so do corporations.
Is stagflation 2022 coming? Government policies may or may not change fast enough to prevent it. Our society might balk at economic attempts to regulate growth. The Federal Reserve might not do enough to help the economy.
But companies with good credit—and the will and means to use it well—will be able to help themselves. They won’t have to wait for a rescue of the economy.
Contact us today to learn how corporate credit and financing can help your company in any economy.