Inventories are slowly recovering, but remain below where they should be.
By Wolf Richter for WOLF STREET.
Consumers hung in there in Q1, and despite raging inflation, their spending grew at a normal pre-pandemic rate. Private investment grew, inventories recovered some, government consumption expenditures and investments fell again, and then there was the – excuse the technical jargon – shitshow that the trade deficit has become.
All put together, GDP, adjusted for raging inflation and seasonality, the so-called “real” GDP, fell by 0.4% in Q1 2022, from Q4 2021, which translates into an annualized rate of -1.4%, according to the Bureau of Economic Analysis today, following the mega-growth in Q4 of +6.9% annualized.
For a better view of the details, I truncated the two historic outliers, the 31.2% plunge in Q2 2020 and the 33.8% spike in Q3 2020 (annualized):
The shitshow that the Trade Deficit in goods & services has become worsened by $192 billion, adjusted for raging inflation (via 2012 dollars) and annualized, the second-worst ever in dollar terms, behind only Q3 2020.
Exports add to GDP, imports subtract from GDP. The so-called Net Exports (exports minus imports) has been a negative on GDP for decades, with exports rising moderately but imports soaring as Corporate America is globalizing production and importing more and more, from Walmart to Apple. Many overseas vendors are now selling directly to US consumers via Amazon and other third-party platforms. During the pandemic, consumers splurged on goods, many of them imported, and the trade deficit exploded.
The WOLF STREET dictum that “Nothing Goes to Heck in a Straight Line” may have to be revised:
So, compare that $192-billion worsening of net exports, which is subtracted from GDP, to the overall decline in GDP $70 billion!
The chart above shows what the overstimulated pandemic boom in consumer spending on goods, many of them imported, has done to the trade deficit, which was already in terrible shape – and it hit GDP good and hard.
It’s an indictment of globalization over the past three decades, committed by our heroes: Corporate America, lobbyists, and governments over the decades.
Raging-inflation adjusted: The Price Index for Gross Domestic Purchases, the BEA’s inflation measure that is part of the GDP report and roughly parallels its inflation adjustments to GDP, spiked by an annualized rate of 7.8% in Q1, the worst since Q2 1981:
Consumer spending rose by an annual rate of 2.7% in Q1, adjusted for raging inflation. This was back in the normal growth range that prevailed between the Great Recession and the pandemic, and shows that consumers are making a mighty effort to outspend this raging inflation.
Consumer spending as a percent of total GDP, at 70.5% in Q1, was higher than normal (in the 68% to 69% range) as other factors in GDP, particularly the trade deficit and government spending worsened.
Gross private domestic investment rose 2.3% (annualized), after the large spike in Q4. This includes fixed investments, such as nonresidential structures, equipment, intellectual property, and residential structures. And it includes “change in private inventories” (more in a moment).
Private inventories rose for the second quarter in a row, adjusted for raging inflation, in a sign of progress in restocking, while the economy continues to be troubled by shortages. This includes the large category of new vehicle inventories which had been desperately low, and which are now starting to tick up. Growth in inventories adds to GDP:
Government consumption and investment declined 2.7% (annualized), the second quarter in a row of declines, with spending by the federal government falling by 5.9%, and spending by state and local governments declining by 0.8%.
Government consumption and investment does not include transfer payments to consumers and companies, such as stimulus payments, unemployment payments, Social Security payments; nor does it include government salaries, and other direct payments to consumers. Those payments enter GDP when consumers and businesses spend or invest this money.
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