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Stagflation. It’s back.
The definition of stagflation is growth below its long-term trend and inflation above trend.
That’s what we got in the first quarter of 2022.
The economy did not just grow slowly. It contracted on an annualized basis. Imports, which are subtractions from GDP, expanded massively and and exports fell. Consumer spending was weaker than expected, suggesting that households balked at high prices. Inventories fell, subtracting from GDP.
U.S. trade policy has left our economy extremely vulnerable to trade imbalances. Because our leaders refuse to erect adequate trade safety-valves, any time the U.S. economy recovers faster than the economies of the rest of the world, U.S. income leaks out to foreign manufacturers. That means Americans earned less and produced less. In March and February, the trade in goods deficit rose to a record highs. The trade deficit wound up subtracting 3.2 percentage points from first quarter GDP.
Inventories were weak after a massive build-up at the end of next year. As I’ve discussed a number of times, last year retailers were headfaked into thinking that year-end holiday sales were going to be strong because early holiday shopping had been better than expected. As it turned out, that early shopping was just people getting their shopping done earlier than usual because prices were rising and they feared shortages. So stores wound up with unwanted merchandise that had to be liquidated at the start of the year.
Personal consumption expenditures were expected to grow at an annual rate of 3.4 percent—in large part because many households are still flush with cash, incomes are rising (before adjusting for inflation, but more on that in a bit), and employment is very robust. Instead, personal consumption rose by just 2.5 percent—flat with the end of last year. That’s very likely a reflection of people engaging in some defensive saving against higher prices they expect and balking at the high prices they are encountering.
Personal disposable incomes rose—but this rise was swamped by inflation. After adjusting for inflation, disposable income fell two percent.
Meanwhile, inflation ran wild. The price index for gross domestic purchases increased 7.8 percent in the first quarter, compared with an increase of 7.0 percent in the fourth quarter. The PCE price index, a measure of consumer inflation that the Federal Reserve uses in its projections and targets, increased 7.0 percent, compared with an increase of 6.4 percent. Even if you exclude food and energy prices—the necessities that President Biden wants you to think of as suffering from “Putin’s Price Hikes”—the PCE price index jumped t.2 percent, compared with an increase of 5.0 percent last quarter.
The establishment media and the allies of the Biden administration are already asking you to pay no attention to the report. It’s not really such a big deal, they say. If you ignore the disappointing consumer spending numbers, ignore the trade deficit, ignore the inventory figures—if you ignore everything that caused GDP to shrink—GDP actually went up. And if you ignore inflation also, the economy is doing great.
If you can bring yourself to ignore all that, you are probably Jen Psaki.
The rest of us cannot afford to ignore it because we are literally paying the price every day for the mismanagement of the economy under Joe Biden and the Federal Reserve.