The first estimate for 1Q GDP came out this morning. Growth of 1.6% was well below expectations of 2.2% with some economists expecting a much higher number. As usual, we’ll go through a couple of adjustments. DKI adjusts for change in private inventories because it reflects inventory stocking or de-stocking as opposed to actual economic activity. 1Q inventory was down .35%. This is consistent with recent mixed economic data. Despite high levels of consumer spending, businesses do not want to carry more inventory. The consumer might be spending huge amounts, but as we’ve pointed out recently, manufacturers are reducing production in anticipation of a slowdown/recession.
Way too weak – especially considering the level of government spending.
The price index for gross domestic purchase was up 3.1% for the quarter which was substantially higher than last month’s 1.9%. Whether you believe the government inflation numbers or not (we don’t), it’s clear that inflation is re-accelerating. The reason we make this adjustment is because price increases don’t represent an increase in economic activity. Imagine you buy a loaf of bread for $1 today. Now, imagine you buy another identical loaf of bread next year for $2. You’ve spent twice as much, but the economic activity (1 loaf of bread) is unchanged. While acknowledging that inflation has come down from its 2022 highs, I’m still skeptical on that 3.1% number. Housing prices haven’t come down by much, and energy prices have started to trend upwards again. I remain unconvinced that food inflation is only 2%. If your household expenses are up ONLY 3.1% from a year ago, I’d love to hear from you.
Making the necessary adjustments, it’s not clear that GDP was actually positive. Adjusting the reported 1.6% by the inventory destocking gets us to an adjusted GDP of approximately 2%. At that point, we’d need to estimate if the price index adjustment is accurate. If you’re experiencing the claimed 3.1% inflation as closer to a 5.1% increase in your cost of living, then that means GDP growth could have been around zero in the quarter. At a minimum, even a small 1% change to the inflation adjustment would leave us with GDP growth around 1% which is both weak and well-below expectations.
Government debt up by more than GDP. Private economy struggling.
Again, we can see how badly government growth is distorting the economy. Growth in GDP from last quarter was $328B. Growth in Federal debt was around $500B in the quarter. That indicates some combination of government spending destroying value and weakness in the private economy. None of these are a sign of a healthy growing economy.
Today’s weak GDP print will encourage those who have been calling for the Fed “pivot” to lower interest rates. Given the recent high and increasing inflation metrics, strong consumer spending, and high asset prices, I think it’s unlikely that today’s report will influence the Fed to reduce rates in June. Higher for longer now applies to both interest rates and inflation.
IR@DeepKnowledgeInvesting.com if you have any questions.
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