The Outsider Perspective Issue 289 | The Beltway Outsiders

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Good Friday Morning! Unless you’re a Tennessee Titans fan like myself, who just watched the franchise trade away the best wide receiver in franchise history. I get why it happened, but I’m still not happy about it. I won’t dwell on it here.

In more fun news, Elon Musk looks set to purchase Twitter. The collective meltdown on the left over this fact is hilarious. Elon, for his part, is having fun. He tweeted about buying Coca-Cola next to put the cocaine back in. He’s also tweeted memes about how the left has lost its collective mind, which has made the left lose its mind. No one has single-handedly roiled Twitter like this since Trump. It’s a lot of fun to watch.

Today, I’m diving into the latest GDP report and breaking down some ramifications of a potentially contracting economy—links to follow.

Where you can find me this week

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[04/25/2022] Europe sanctions Russia and foots the bill – Conservative Institute

[04/29/2022] We’re using food for fuel in a food shortage crisis – Conservative Institute

From prophecy to reality: Biden towers over Carter.

Nearly a year ago, I wondered whether the image of Joe Biden and his wife towering over Jimmy Carter and his wife would be the prophetic image to describe this era. At the time, it was a simple comparison. Inflation was only 2-3 months old, Afghanistan hadn’t happened, a war in Ukraine was a hypothetical situation, and we hadn’t hit the Delta/Omicron waves.

I think that moment was prophetic now. Biden’s failures are metaphorically towering over Jimmy Carter. It took four years for Carter to go through the complete list of his catastrophes; Biden hasn’t even hit the year and a half mark.

I’m trying not to be hyperbolically political on this point. But that image of Biden was one of the first things to hit my mind when I saw the first read of the first-quarter GDP for this year. Q1 2022 experienced the first GDP contraction since February 2020, when the COVID-19 pandemic recession hit.

Let’s start with the official report and go from there. The BEA report stated:

Real gross domestic product (GDP) decreased at an annual rate of 1.4 percent in the first quarter of 2022 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 6.9 percent.

The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased. Personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased (table 2).

The decrease in private inventory investment was led by decreases in wholesale trade (mainly motor vehicles) and retail trade (notably, “other” retailers and motor vehicle dealers). Within exports, widespread decreases in nondurable goods were partly offset by an increase in “other” business services (mainly financial services). The decrease in federal government spending primarily reflected a decrease in defense spending on intermediate goods and services. The increase in imports was led by increases in durable goods (notably, nonfood and nonautomotive consumer goods).

The increase in PCE reflected an increase in services (led by health care) that was partly offset by a decrease in goods. Within goods, a decrease in nondurable goods (led by gasoline and other energy goods) was partly offset by an increase in durable goods (led by motor vehicles and parts). The increase in nonresidential fixed investment reflected increases in equipment and intellectual property products.

If you want to dig in and read through it, there’s more data.

There are two things I need to note about this report based on questions and comments I’ve seen from people on social media. First, this report does not mean we’re in a recession. A recession is defined as follows:

A recession is a macroeconomic term that refers to a significant decline in general economic activity in a designated region. It had been typically recognized as two consecutive quarters of economic decline, as reflected by GDP in conjunction with monthly indicators such as a rise in unemployment. However, the National Bureau of Economic Research (NBER), which officially declares recessions, says the two consecutive quarters of decline in real GDP are not how it is defined anymore. The NBER defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

The COVID-19 recession from February to March 2020 would never have qualified as a recession under quarterly GDP reports. The NBER’s changed definition allows for faster and more accurate recession calls. For instance, it was clear the economic downturn in 2020 began in February, not March. And because it didn’t span a full two quarters, old definitions wouldn’t have worked.

The second point is why I led with the Carter/Biden reference. A recession hasn’t arrived (yet), but something else has. Stagflation is officially on the table. Here’s the stagflation definition:

Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).

We’re in the alternative definition: high inflation with GDP decline. The GDP reports may reverse in Q2, or later revisions to Q1 make it a favorable report — this is only a first read. Much like measuring inflation in March/April of 2021, it’s hard to say where we are currently.

But even with uncertainty, we’re experiencing the worst part: high inflation and low growth. That kind of environment chews through wages and hurts everyone.

The White House is putting a positive spin on the GDP report — and they have a point. Not everything in the BEA first look GDP for Q1 is terrible.

The Wall Street Journal describes many of these contradictions:

But the report also showed that private demand actually strengthened, with spending by U.S. consumers, businesses and other private purchasers growing at a 3.7% annual rate in the first quarter versus the fourth quarter’s 2.6%.

For starters, the trade deficit expanded, meaning that some U.S. demand was basically met by other countries’ production. That alone shaved 3.2 percentage points off GDP growth. A growing trade deficit shouldn’t be taken lightly, but in the first quarter it was brought on in part by the roiling effects of the pandemic on international trade: A lot of shipments that would otherwise have landed in the U.S. this fall landed in the winter instead.

In the first quarter, the ports of Los Angeles and Long Beach took in 31% more loaded shipping containers than in the same period of 2019, while in the fourth quarter, they took in 3% fewer than three years earlier.

Another thing that weighed on GDP was that, adjusted for seasonal swings, companies didn’t build inventories at quite as heady a pace as in the fourth quarter. This meant that less production went into filling inventories, shaving an additional 0.8 percentage points off GDP. The fact remains, however, that shortages have left inventories woefully low, and that, given the opportunity, companies will continue to restock their warehouses through the year. That should be a plus for GDP in the quarters to come.

You can also look at the strength of consumer balance sheets, the strong economy, and more to see signs of light. Does this matter politically? No, it’s hard to spin a negative GDP report, no matter how you phrase it.

The caveat to all those strengths is this: The Federal Reserve. The WSJ piece ends with this: “On the other hand, the economy is bound to slow at some point, if only because the Federal Reserve wants it to. The negative first-quarter GDP print will hardly keep the central bank at bay; rather the firming of demand the details of the report showed might only steel its determination to keep raising rates until both inflation and the job market cool off.”

The more the Fed believes it has to break the economy to fix inflation, the more likely a recession. That’s why Deutsch Bank issued its most dire prediction yet:

The bank pointed to the Fed’s goal of bringing inflation down to 2% from its most recent rate of 8.5%, the highest in 40 years. To reach that goal, the Fed will have to raise rates so aggressively that the economy will be badly damaged, according to Deutsche Bank.

“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in the report.

The trillion-dollar question is this: which direction does the Fed go? Do they break the economy, starting a recession to kill inflation right before an election? Or is this a dovish Fed that pulls the brakes on raising rates and allows inflation to continue?

If I knew the answer to that, I could make millions. But like everyone else, I’m waiting to see the true nature of the Fed and whether its toolbox does what it claims. In the meantime, based on this report, the stagflation threat is real.

This GDP report may be a one-off, and the White House could be correct with its positive spin. It’s also possible their spin is this year’s version of “transitory inflation,” and we’re only at the beginning of a downturn. I don’t pretend to know the answer there, but it’s hard to ignore the shadow of Biden looming over Carter.

Links of the week

At least 58% of U.S. population has natural antibodies from previous Covid infection, CDC says – CNBC

Diesel for Dinner – Doomberg

Corn and Soybeans Near Record Prices, Push Food Costs Higher: Ukraine war, drought in South America and biofuel demand pressure supplies of the crops – WSJ

Four European gas buyers have paid Russia in rubles for supplies, bucking the EU’s urging in the energy face-off – Yahoo Finance

Russia accused of blackmailing European nations as it cuts off gas to Poland and Bulgaria: Poland’s climate minister insists the country is prepared for such a situation after working for years to reduce its reliance on Russian energy sources. – Sky News

Our Inhumane Southern Border: Migrants and Americans suffer when the law is absent – Carine Hajjar, National Review

The Politics of Pure Affiliation Has Driven Everyone Absolutely Insane – Freddie deBoer

Joe’s missing millions! Financial records reveal Biden had $5.2million in unexplained income – as emails show he paid Hunter’s legal bills for one megabucks Chinese deal and was tapped as ‘big guy’ to get a 10% cut in another – Daily Mail UK

Two million children at risk of starvation in Horn of Africa – U.N. aid chief – Reuters

Indonesia may widen palm export ban to combat shortages – Reuters

Dry Weather Forecast Calls For Higher Food Prices—And Billions In Farm Losses – Forbes