Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping US Manufacturing
Transcript
- Lucas: So the latest import price data landed last week, and here's the number that caught my eye: goods from China now cost more than at any point since 2008. That's a big deal for any manufacturer that relies on Chinese components, which is pretty much everyone. Luna: And this isn't just a tariff story, right? The headline is about Trump's new global tariff, but the underlying issue is that Chinese producers themselves are raising prices. Lucas: Exactly. The tariff adds a layer, but even before that, Chinese factory-gate prices have been climbing for eighteen months. Combine that with a tight US labor market — unemployment at 4.2 percent, job openings still above 7.5 million — and you get a perfect cost-push storm for American manufacturers. Luna: So stagflation is showing up in their profit margins? I mean, they can't pass all of that onto customers if demand is slowing. Lucas: That's the classic squeeze. Let's look at a concrete example: Caterpillar. They're a bellwether for industrial manufacturing. Their input costs — steel, electronics, freight — have all gone up. And they're competing for welders and engineers against every other factory in the Midwest. Their last earnings call mentioned labor shortages as a bigger headwind than demand softness. Luna: Right, so the growth side is still there — GDP grew at 2.1 percent annualized last quarter — but the inflation side keeps eating into margins. That's the stagflation dynamic in microcosm. Lucas: And the funny thing is, economists keep arguing whether we're actually in stagflation because unemployment is so low. But for a company like Caterpillar, the symptoms are real: rising costs, slower volume growth, and no pricing power to fully offset it. Luna: So what do they do? Just eat the margin compression? Lucas: Some of it, yeah. But they're also investing in automation to reduce labor dependence. That's a long-term play, though, and it costs capital. Meanwhile, smaller manufacturers without Caterpillar's balance sheet are really feeling the pinch. I've seen surveys from the Institute for Supply Management where purchasing managers are reporting the highest input price indices since the early 1970s. Luna: That's the echo. And we just saw core PCE tick up again, even if CPI eased a bit. So inflation isn't dead, but growth isn't roaring either. Lucas: Exactly. The Fed is in a bind — they don't want to overreact, but they also can't ignore persistent inflation. Kevin Warsh's latest speech had some carefully parsed language about being 'patient but vigilant.' That's Fed-speak for 'we're watching the data and we don't know what to do.' Luna: So for manufacturers, the playbook isn't clear. Do they reshore aggressively, or ride out the import cost wave? Lucas: Some are reshoring, but it's slow. The data from the Reshoring Initiative shows that in 2025, about 250,000 jobs came back to the US. That sounds big, but it's a drop in the bucket compared to total manufacturing employment of nearly 13 million. And the new plants take years to build, and they're expensive. So in the short term, manufacturers are stuck between China's higher prices and domestic labor costs. Luna: And the consumer is stuck with higher prices, which feeds the inflation side of stagflation. Lucas: Right. That's the feedback loop. Higher import costs push up producer prices, which eventually show up in consumer prices. And if consumers start pulling back because their real wages aren't keeping up, that kills the growth side. Luna: This is the kind of granular economic logic that I don't think you'd get on a typical business news show. Lucas: Yeah, that's the whole idea. And if you find these conversations helpful, there's a simple way to keep them going: listener support at buy me a coffee dot com slash fexingo. No pressure, no perks, just helping the show stay independent. Luna: Exactly. It's a small way to say this content matters. And we appreciate every one who chips in. Lucas: Now, back to the feedback loop I mentioned — there's a specific data point that illustrates how sticky this is. The 10-year breakeven inflation rate is now at 2.21 percent, down a bit from earlier this year, but still above the Fed's 2 percent target. So bond markets are pricing in persistent, not runaway, inflation. That's the 'slow-burn stagflation' scenario. Luna: And that slow burn is harder for companies to plan around. If inflation were spiking, they might make drastic changes. But when it's just persistently eating away at margins, it's more insidious. Lucas: Exactly. It's death by a thousand cuts. For manufacturers, that means every procurement decision gets more scrutiny. I talked to a sourcing manager at an auto parts supplier last month who said they're now quoting prices for only 90 days instead of a year. That's how fast input costs are moving. Luna: So volatility itself becomes a cost. Contracts get shorter, hedging gets more expensive, and everyone builds in more cushion. Lucas: Right. And that cushion eventually shows up in final goods prices. Look at the PCE index — up again in May to 131.5 from 130.94. That's not a giant leap, but it's a steady climb. And it's broad-based. Luna: So if I'm a manufacturer listening right now, what's the one thing I should be watching? Lucas: I'd watch two things: the University of Michigan consumer sentiment index and the JOLTS labor turnover data. Consumers are starting to feel the pinch, and if they pull back, demand drops. Meanwhile, if quits stay high, wage pressure continues. The combination of falling demand and rising wages is the worst for manufacturers. Luna: And that would push us closer to the full stagflation playbook of the 1970s. Lucas: Yeah. But there's one difference: back then, productivity was falling. Now, we're seeing some productivity gains from automation. It's not enough to offset everything, but it's a buffer. The question is whether it holds. Luna: So maybe the takeaway is that manufacturing is adapting, but it's a slow, painful process. Lucas: That's about right. And the data over the next few months will tell us whether the adaptation is working or whether the squeeze gets worse.