Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Remaking the US Postal Service
Transcript
- Lucas: So, the US Postal Service just filed its quarterly report, and the numbers are a perfect little snapshot of what stagflation does to a legacy institution. First-class mail volume is down another three percent year-over-year, package volume is basically flat, and the service is staring at an annual loss of six and a half billion dollars. Luna: Six and a half billion. That's not a rounding error. And it's not just about people emailing instead of writing letters. There's something deeper going on with the cost structure. Lucas: Right. The thing is, the Postal Service is uniquely exposed to the two forces of stagflation. On the inflation side, fuel costs, vehicle maintenance, health benefits for a massive retiree population — all of that is sticky. On the slow-growth side, mail volume tracks GDP, and when GDP growth is running at one point five percent, there's just less stuff to send. Luna: And unlike a private company, they can't just pivot. They have a universal service obligation — they have to deliver to every address, six days a week, whether it's profitable or not. Lucas: Exactly. And that obligation was written into law in the 1970s, which is a nice twist given our 1970s theme. But the real anchor on their balance sheet is the 2006 Postal Accountability and Enhancement Act. That's the one that forced them to prefund retiree health benefits for the next seventy-five years, and it's something like five and a half billion dollars a year just for that. Luna: So they're paying for health care for people who haven't even been hired yet. That's not a cost they can cut by closing a facility or slowing down a truck. Lucas: Right. And it's the kind of fixed cost that gets brutal when revenue is flat. When the real economy grows at two percent plus, you can maybe grow into that burden. At one point five percent — which is where we are, per the latest GDP print — you can't. And with the CPI still running at around two point three percent, above that growth rate, you're in the textbook definition of stagflationary territory. The Post Office is fighting an inflation rate that's higher than the growth rate of the economy that generates its mail. Luna: That's the core squeeze, right there. And the data backs it up — first class mail has been declining steadily for years, but the decline speeds up when GDP slows, because businesses cut direct mail and marketing budgets first. Lucas: And that's not just a letter problem. Packages, which were supposed to be the savior, have hit a wall. The e-commerce boom gave them a second act, but now package volume is flat. Consumers are still spending, but they're trading down, buying less, and the delivery market is brutally competitive with UPS and FedEx. Luna: So what's the actual plan here? They've talked about EVs, Sunday delivery, even closing some rural post offices. But does any of that move the needle against a six and a half billion dollar loss? Lucas: Some of it does, but it's a slow grind. They're rolling out electric delivery vans, which cuts fuel and maintenance costs — and with fuel prices sticky, that's a real hedge. But the bigger lever is what they call 'network modernization' — consolidating processing plants and cutting delivery routes. They're aiming for something like three billion dollars in annual savings by 2028. Luna: Three billion against six and a half billion — that still leaves a gap. And that's before you get to the political football of cutting service in rural areas, which is where a lot of the cost is. Lucas: Yeah, this is where it gets genuinely hard. The universal service obligation is popular in the abstract, but the per-address cost of delivering in rural Montana is three times what it is in Manhattan. And in a slow-growth economy, you can't grow your way out of that. The service has to either find new revenue or get legislative relief. Lucas: And that's actually a perfect segue to something I want to mention. This kind of deep, structural story is exactly why we make this show. We dig into the numbers and the history so you can see how a big institution really works. And if that's been useful to you, a couple of dollars a month genuinely keeps us going. You can support us at buy me a coffee dot com slash fexingo. Luna: Yeah, honestly, a few bucks from a few hundred listeners is what keeps this thing ad-free and independent. No pressure, but if you've gotten something out of our episodes, it makes a real difference. Lucas: So back to the Postal Service. The irony is that the 2006 prefunding mandate was meant to put the service on sound financial footing, but it ended up being the albatross. The Postal Service Reform Act in 2022 finally abolished that prefunding requirement, but it didn't undo the accumulated debt or the underlying volume decline. Luna: So they got some relief, but not enough to fix the structural problem. And now they're caught in this stagflationary loop — costs keep rising faster than revenue, because the economy isn't growing fast enough to generate the volume they need. Lucas: Exactly. And the service's own projections show that even with the reforms, they're barely breaking even on a cash basis in the next few years. But the real test is what happens when the next recession hits. In a stagflation scenario, with rates staying high, the volume drop could be sharp, and the service's fixed costs won't budge. Luna: That's the scary part. We've seen how resilient the Postal Service has been through crises — the 1918 flu, the Great Depression, the 1970s oil shocks. But each time, the economy eventually grew again. This time, if growth stays tepid, the mail might not recover. Lucas: And that's the deeper question. The Postal Service is a kind of canary for the broader economy. If it can't adapt to stagflation, it might be a sign that other legacy institutions are in trouble too.