Wall Street History

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Wall Street History

02/29/2008

Stagflation?

There is much talk these days about the potential for the return of
“stagflation.” But as economist Robert Samuelson writes in his
op-ed for the March 3, 2008, edition of Newsweek (as well as the
Washington Post), the term is being misused.

“We’re told by eminent newspapers and commentators that
stagflation is the messy mixture of both high inflation and high
unemployment. It isn’t. Stagflation, at least as the concept was
initially understood in the 1970s, meant something different.
Yes, it signified the simultaneous occurrence of high inflation,
high unemployment and slow economic growth; but it’s defining
feature was the persistence of this poisonous combination ‘over
long periods of time.’ Although we’re drifting in that direction,
we’re not there yet.”

The combination of rising inflation and unemployment isn’t
unusual, but it’s normally temporary, because, as Samuelson
writes, “the higher unemployment – stemming from an economic
slowdown or recession – helps control inflation. Companies
can’t pass along prices increases; they’re stingier with wage
increases. It’s only when this restraining process is not allowed
to work that inflationary psychology and practices take root,
creating a self-fulfilling wage-price spiral. Higher wages push
up prices, which then push up wages. Then we get stagflation: a
semipermanent fusion of high joblessness and inflation.”

Samuelson points to the period 1969 to 1982 as a classic example
of stagflation. Over this time inflation averaged 7.5 percent and
unemployment 6.4 percent. By comparison, the two
corresponding figures today are 4.3 (CPI) and 4.9 percent,
respectively.

So I thought we’d take a look at the actual figures during this
timeframe, extending it a bit to include a few years both before
and after, thanks to data gleaned from the Federal Reserve and
Bureau of Labor Statistics.

.CPI ..unemployment rate

1966 ..3.5 ..3.8
1967 ..3.0 ..3.8
1968 ..4.7 ..3.6
1969 ..6.2 ..3.5
1970 ..5.6 ..4.9
1971 ..3.3 ..5.9
1972 ..3.4 ..5.6
1973 ..8.7 ..4.9
1974 .12.3 .5.6
1975 ..6.9 ..8.5
1976 ..4.9 ..7.7
1977 ..6.7 ..7.1
1978 ..9.0 ..6.1
1979 .13.3 .5.8
1980 .12.5 .7.1
1981 ..8.9 ..7.6
1982 ..3.8 ..9.7
1983 ..3.8 ..9.6
1984 ..3.9 ..7.5
1985 ..3.8 ..7.2

I would just add that when looking at the period 1966 to 1982,
these were the wilderness years for the U.S. stock market.

For instance, the Dow Jones Industrial Average closed at 995 on
2/9/66, after hitting 1000 a few times, intraday, in both January
and February of that year.

The Dow then didn’t close above 1000 until 11/14/72 1003.

On 1/11/73, the Dow hit its high, 1051, after which we entered
the awful bear market that saw the Dow bottom at 577 on
12/6/74; a decline of 45%.

Then it was another period of just meandering around for the
most part, after the post-bear rally, and on 8/12/82, the Dow
bottomed for good, 776. By year end, 12/31/82, the Dow had
risen to 1046.

So, from 1966 to 1982, the Dow Jones went nowhere. But,
dividends were king during this time and thus the total return for
investors was still solid.

Sources: Federal Reserve; Bureau of Labor Statistics; “Dow
Jones Averages: 1885-1995,” edited by Phyllis S. Pierce

Wall Street History returns next week.

Brian Trumbore

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