Signals for Stagflation Get Some Static
GDP and gas and rent costs are contrasting with AI bubble chatter and jobs picture.
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The probability of a stagflation or something similar in 2026 remains significant. But the cross currents around potential stagflation, or "slugflation" as Doug Kass has dubbed it, have increased. The thesis behind stagflation seems like it is fading in some ways. After all, economic growth based on headline numbers is quite robust. Gross domestic product growth came in at nearly 4% in the second quarter. The latest projection that came out from the Federal Reserve Bank of Atlanta yesterday, has 3.5% GDP growth estimated for the third quarter.
It should be noted that a good chunk of U.S. economic growth in recent years has been powered by federal fiscal deficits that have run at 6% or 7% of GDP. With U.S. debt-to-GDP ratios near historical highs, obviously this is unsustainable. At least the U.S. is experiencing some economic growth while adding to its debt load, unlike France and others that are operating on similar types of fiscal gaps.
And, of course, the substantial surge of tech spending in connection to the AI Revolution has been a huge growth driver for the U.S. economy as massive AI data centers get built throughout the nation. Concerns around a potential AI bubble, however, have been picking up of late. In addition, this demand is largely driven by companies like OpenAI -- a company that should post around $14 billion in revenues in 2025, but has made more than $1.4 trillion in commitments for future computing power. Whether OpenAI will live up to those promises is an open question.
On the employment front, layoff notices in October surged to their highest levels for the month since 2003. Yesterday’s initial government estimate for October’s labor picture showed 105,000 jobs lost for the month. The unemployment rate continued to tick up to 4.6% in November. It should be noted that just over 160,000 of the positions lost in October consisted of the federal workforce from workers that took buyouts earlier this year. They are finally showing up in the employment numbers. The private labor force has seen average monthly gains of 75,000 over the past three months.
On the inflation front, we are still significantly above the Federal Reserve’s official 2% target. One reason that futures are only pricing in one quarter-point reduction in the Fed Funds rate in 2026. Costs for items like medical insurance and electricity are still rising faster than inflation overall. Property insurance rate hikes are particularly vexing down here in Florida. One of many reasons that home listings and housing inventory have moved much higher here in the Sunshine State.
But I see some good news around some core consumer costs. Average gasoline prices are below three bucks a gallon nationally, near five-year lows. In addition, national rents have now fallen on a year-over-year over basis for four straight months now. With the huge surge of apartments that have come online in recent years combined with mass remigration, I expect this trend to continue. And the "shelter component" is by far the largest component of the monthly consumer price index calculation.
Falling rents are another headwind for homebuilders. Especially, with a recent survey pegging the cost of owning a single-family home at more than 50% higher than renting the same home across the top 100 metro regions. Giant homebuilder Lennar (LEN) lowered its margin guidance yet again along with its quarterly results that were posted after the bell Tuesday. The stock is likely to get hit on that revised guidance in trading today. I also expect 2026 will be a dismal year for the housing sector.
In summary, I still believe the U.S. could see stagflation play out in 2026, but the economic picture is getting increasingly muddled as 2025 comes to a close.
At the time of publication, Jensen had no position in any security mentioned.
