Skip to main content

GDP Got Eaten By Inflation

Technically, because GDP was negative for two quarters, it's a recession. However, there are caveats to current economic conditions, which mean if it is a recession, it's very mild. And there's still that pesky 2yr/5yr bond rate inversion (2.9/2.72).

It's inflation that is the beast, which will undo everything.  The GDP Price Index came in at an 8.7% increase, well above expectations of an 8.0% gain and compared to the unrevised 8.2% rise seen in Q1.

By Kelly Evans
The Exchange, CNBC

Why was real GDP negative in the first half of this year? Because inflation ate up all the gains.

The bombshell report this morning showed that real GDP shrank again in the second quarter, by 0.9% annualized, after a 1.6% drop in Q1. But wait, how can real GDP be shrinking while the labor market at the same time added 2.7 million jobs, and the unemployment rate fell from 4% to 3.6%? Because inflation ate up all the real economic gains.

Nominal GDP--actual dollars before any adjustment for inflation--surged by a whopping 6.6% in the first quarter, and 7.8% in the second quarter. That's twice the size of what we used to see in the sluggish expansion of the 2010s. Turns out, it's way more than this economy can actually handle. So the huge nominal GDP boom we've had is all simply going into higher prices; the inflation rate was over 8% in the quarter, and that's how you end up with a negative "real" print.

Was the U.S. actually in recession, meaning the end of a business cycle? Probably not, as we've already discussed. The economic indicators, from the labor market to retail sales to industrial production, were all higher in May than January, and so far for June as well. Just yesterday, new orders for durable goods--a key leading indicator--came in stronger than expected. Orders have steadily risen this year, running as of last month at a 6% annualized pace--which would not be happening at the end of a business cycle. As for leading gauges of the labor market, new jobless claims actually fell last week, to a modest 256,000.

What this all shows is an economy that was overheated by monetary and fiscal stimulus, not one that was too soft or too weak. How else do you end up with 8% surging nominal GDP last quarter, on top of last year's whopping 10% gain? Certainly you don't get that from supply-chain constraints or high oil prices. And because we couldn't handle it all quickly enough as "real" economic gains, instead we simply got higher prices. 

Inflation caused negative real GDP.

Comments

Popular posts from this blog

California: A Model for the Rest of the Country, Part 2

Part 1 here . On Leaving the Golden State Guest Post by NicklethroweR . Posted on the Burning Platform. The fabled Ventura Highway is all that separates my artist loft from the beach where surfing first came to the United States. Both my balcony and front patio face the freeway at about eye level and I could easily smack a tennis ball right on to the ever busy 101. Access to the beach and boardwalk is very important to a Tourist Town such as mine and I can see one underpass from my balcony and another underpass from the patio. Further up the street are two pedestrian bridges. Both have been recently remodeled so that people can not use it to kill themselves by leaping down into traffic. The traffic, just like the spice, must flow and the elites that live here do not like to be inconvenienced as they dart about between Malibu and Santa Barbara. Another feature of living where I live would have to be the homeless, the insane and the drug addicts that wander this particular...

Top Five Consumer Cyber Security FAQs

Business, technology, environmental and economic changes are a part of life, and they are coming faster all the time. All of these changes and advancements can be distracting and make us more vulnerable to cyber scams. That's why protecting your credit is a critical part of protecting yourself from cyber security threats. Security researchers have reported that hackers and scammers are using any opportunity or vulnerability to target both individuals and companies. You may have already seen these attempts in the form of fake emails or calls. Here are the top five questions Equifax ®  has received about how individuals can protect themselves from cyber security threats and help to improve your credit protection. 1. How can I better protect my credit? Check your credit reports frequently. You can get free credit reports from the nationwide credit reporting agencies (Equifax, Experian ®  and TransUnion ® ) at annualcreditreport.com. Check your credit reports frequently to closely...

School Choice Passed by Texas Senate

The Texas Senate on Thursday approved a $500 million school choice bill mostly along party lines after hours of passionate debate. It will now head for consideration in the House, where members rejected similar proposals during the regular session. Senators passed Senate Bill 1 by a 18-13 vote, with one Republican joining all Democrats in voting against the measure. The bill will likely face steep resistance in the House, where Democratic members and many rural Republicans have vehemently opposed such proposals. School choice programs, also called education savings accounts or vouchers, use public money to help pay for a child’s private schooling. “We must recognize that a one-size-fits-all approach doesn't fit the needs of our diverse student population,” said Sen. Brandon Creighton, R-Conroe, who authored SB 1 and estimated the proposal could serve about 60,000 students. Texas has about 5.5 million children in public schools. Public schools have failed the American people, especi...