The Bureau of Economic Analysis (BEA) released the First Quarter GDP figures today [DATA HERE] showing the U.S. economy contracted -1.4% in the first quarter.
Gross Domestic Product (GDP) is the dollar value of all goods and services produced in the economy, minus the dollar value of goods and services we import. The percentages discussed are percentages of change over time.
The first quarter result was an annualized rate of negative 1.4 percent, meaning the U.S. economy is shrinking. However, this should not come as a surprise as the primary driver of our GDP is consumer spending. With everything costing more, less stuff is purchased. Less stuff purchased leads to less stuff generated.
While the first quarter result of -1.4% is not a surprise, in the commonsense perspective, the fact that BEA didn’t revise the fourth quarter result of +6.9% is a little eye opening. There’s no way in an apples-to-apples valuation the U.S. economy goes from +6.9% to -1.4% in one quarter. Instead, what we are seeing is the effect we mentioned when the Q4 result was announced. The BEA is modifying their assumptions by increasing the inflation rate in their calculations of the value of goods and services. They really didn’t have a choice.
You might remember my prior opinion that the Q4 numbers were very overinflated because of two factors: (1) they underestimated inflation; and (2) the December 2021 import data from the Port of Los Angeles (POLA) was missing [NOTE: remember, Buttigieg was there in November and POLA supervisors are on team Biden]. I said at the time that if my hunch was correct the first quarter 2022 import data would be magnified by the December POLA data being added. Remember, imports are a deduction to the GDP equation.
Well, what shows up in Q1? A massive increase in first quarter import data that surprised everyone. Go figure… lol.
Let’s look at the data
♦ {TABLE 1 TOP LINES} We can see the economy contracted by 1.4% overall.
When you look at the +4.1% growth in durable goods we must factor in the BEA inflation assumption. Did more durable good units get sold, not likely. It’s likely less units sold but at a higher price, therefore the aggregate value of the durable goods gives a false impression of an increase.
Consider nondurable goods declining by 2.5%. Did less food, fuel and energy get consumed at higher prices? Or was the inflation assumption wrong?
Also check out the Exports change from Q4 (2021) to Q1 (2022). From +23.4 to -9.6. That’s a big change in exports.
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♦ {Table 4 Tells a story} Now we are looking at prices.
The value of our exports leaves the U.S. carrying the increased rate of U.S. inflation to produce them. A whopping +22.9% in price.
However, the value of the imports (again in dollars) is only 15.9% higher.
All things being equal, there’s a 7% price difference between exports and imports.
Inflation is high globally; however, inflation is higher here in the U.S. than overseas.
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Remember, the GDP isn’t a measure of the actual outputs of stuff created, the Bureau of Economic Analysis is only measuring the aggregate value of the stuff, ie. what it’s worth.
- 20 trillion units at $1.00 per unit equals $20 trillion dollars.
- 20 trillion units at $1.05 per unit equals $21 trillion dollars.
- An increase of 5% in economic valuation (GDP), but we haven’t created a single product more.
Did our economy contract by only 1.4% in the first quarter? Or are we seeing inflation continually skewing the valuation of goods and services, while the actual outputs in the economy are shrinking by much more?
Did you pay 20% more at the grocery store and leave with more food stuff? Or did you pay 20% more at the checkout and leave with less food stuff than previous?
I think we all know the answer to those questions.
Checkbook economics is the only economics that matters.