The economy officially shrunk in the first quarter despite the steady drumbeat of supposedly positive news from the administration and the mainstream media. Economists continue to insist the odds of a recession are low, though we may be in the middle of one already. Some seem to believe the economy is great, but the people just can’t understand the greatness.
Recently, I argued that the United States was facing a looming economic disaster brought to you by President Biden. I based my belief on two simple facts. First, President Biden and his enablers in the expert class plus the mainstream media have been talking up the greatness of an economy they completely fail to understand, taking credit for growth that was purely a result of healing from the self-inflicted wounds of the lockdowns and inflation, rather than an organic, sustainable phenomenon. Second, these same groups were simultaneously downplaying and underestimating the impact of the highest inflation in decades coupled with a supply chain crisis they seemed incapable of addressing. The result, in my opinion, was a toxic mix that would soon lead to an economic crisis, despite the cheerleading in the headlines. On Thursday last week, we learned that I was almost certainly correct: The US economy shrank “unexpectedly” in the first quarter, down some 1.4%, the first and most important data point that signifies a recession.
As CNBC described it, the economy “fell off a cliff” when gross domestic product “unexpectedly declined at a 1.4% annualized pace in the first quarter, marking an abrupt reversal for an economy coming off its best performance since 1984, the Commerce Department reported Thursday.” Unexpected appears to be the keyword here because even the normally conservative Dow Jones had expected a 1% gain. Perhaps needless to say, CNBC continued to offer a litany of largely meaningless excuses, from Omicron to inflation to Russian President Vladimir Putin. They also attempted to spin consumer spending as a bright spot, noting that the figure “held up fairly well for the quarter, rising 2.7%.” While this might seem promising in isolation, inflation surged much higher over the same period, 7.5% in January, 7.9% in February, and a whopping 8.5% in March, meaning the quantity of goods and services purchased likely declined despite the headline number. Putting this another way, consumer spending only increased because of costs, and that increase falls well short of the rise in those costs. If prices had remained the same year-over-year, consumer spending probably would’ve fallen, perhaps substantially. CNBC described it thusly, “Prices increased sharply during the quarter, with the price index for gross domestic purchases surging 7.8% in the three-month period, following a 7% gain in the fourth quarter of 2021.”
Of course, CNBC is also sure to note that “recession expectations on Wall Street remain low,” even though “there’s further trouble ahead for the economy: In an effort to combat burgeoning price increases, the Federal Reserve plans to enact a series of rate hikes aimed at slowing growth further.” Think about that for a moment: The geniuses on Wall Street think the odds of a recession remain low, but they expect growth to slow because of the Federal Reserve. Growth is at negative 1.4%, slowing further is even more of decline, which will almost certainly result in at least two quarters of negative growth, the definition of a recession. As Ozzy Osbourne once sang in the 1991 hit “No More Tears,” it’s like “going forward in reverse.” To be sure, there are some who might dispute my analysis and I am no economist. John Cassidy writing for The New Yorker argues that we shouldn’t “take the surprising drop in GDP at face value.” He points to defense spending, which can fluctuate quarter to quarter, and a rise in imports while existing US inventories were sold off as the primary factors driving the contraction, believing they will be short lived. In his mind, “American households continued to spend amply in the first three months of this year, and U.S. businesses invested heavily in new equipment, particularly in information technology. Over-all sales generated by the private sector increased at a healthy annual rate of 3.7 per cent, which augurs well for the rest of the year.”
Unlike CNBC, he describes the 2.7% increase in consumer spending as absolute consumption, adjusted for inflation, noting that “personal consumption increased at an annualized rate of 2.7 per cent, and nonresidential private fixed investment in equipment rose at a rate of 15.3 per cent.” It is true that these numbers, or at least some of them, are supposedly adjusted for inflation, but there are two reasons to doubt whether this is captured accurately. First, the Federal government uses a significantly lower inflation number, one that puts it at 5.2%. In their assessment, “current dollar” GDP which is not adjusted for inflation increased at 6.5%, but again that is lower than the overall rate of inflation itself. Second, the GDP report noted something potentially more ominous: Real disposable income for consumers declined 2%, along with the savings rate, which fell some $180 billion, from 7.7% in the fourth quarter last year to 6.6% in the first quarter, meaning that even if absolute consumption did in increase, it was driven by people dipping into their savings, an unsustainable phenomenon in the long run. There is evidence the situation is even worse: Another report issued last week found that inflation pushed workers total wages and benefits down 3.7%.
Regardless, Mr. Cassidy concludes, “If you add these three volatile factors affecting G.D.P. together, they reduced the headline growth figure by roughly 4.5 percentage points, which explains why it came in negative even though underlying spending by households and businesses was strong. It should also be noted that in the first three months of the year employers created nearly 1.7 million jobs, and the unemployment rate fell from 3.9 per cent to 3.6 per cent. In other words, the headline G.D.P. figure was misleading.” To support his conclusion, he cites Greg Daco, chief economist at EY-Parthenon, who said, “Cutting through the noise, the U.S. economy appeared generally robust,” along with the economics team at Goldman Sachs, who claimed the report had “much firmer” internals. Alas, Mr. Cassidy fails to inform his readers that Mr. Daco has been consistently wrong about the Biden economy, painting a rosy picture at odds with reality many times, driven largely by his faith in government spending as the solution to all economic problems. Barely a year ago, Mr. Daco was claiming, “We anticipate a summer mini-boom in activity, juiced up by reduced virus transmission, increased vaccine diffusion and generous fiscal stimulus.” In his view, “The key engine of growth is going to be that powerful cocktail of both a healthier economy along with fiscal stimulus.” We know how well that prediction panned out.
To his credit, Mr. Cassidy is fair enough to acknowledge that the future might not be so bright, cautioning that the “big economic question is what will happen to spending by households and businesses—the bedrock of the economy—as the Federal Reserve moves to raise interest rates, last year’s stimulus continues to diminish, and high inflation rates continue to eat into purchasing power. Already, there are signs that some types of interest-sensitive spending are being affected: with mortgage rates rising, existing-home sales fell in February and March.” Some journalists and pundits were not nearly so objective in their assessment. Alana Semuels, writing for Time Magazine, believes “The Economy is Great. The Middle Class is Mad.” She begins with an anecdote about a man named Jeff Swope, who felt the “first spurt of anger bubble up when he learned in February that his landlord was raising the rent on the empty two-bedroom apartment next door by more than 30%, to $2,075 a month.” She quotes Mr. Swopes himself, saying “The frustration—it was always a frog in the boiling water type of thing. I’d always felt it, but on a basic level. Something’s always brewing. We looked at the rent increase, and it was like, OK, this is ridiculous. I was like, ‘What the???’” Ms. Semuels uses this and other anecdotes along with a few data points to conclude “Middle-class U.S. families have been treading water for decades—weighed down by stalled income growth and rising prices—but the runaway inflation that has emerged from the pandemic is sending more than a ripple of frustration through their ranks.”
In other words, it’s not Biden’s fault, even though this frustration exists when “On the surface, the economy looks buoyant. But like Swope’s slowly cooking frog, lots of middle-income earners are realizing that they’re in hot water and going under.” She quotes Richard Reeves, the Future of the Middle Class Initiative Director, “It’s not like this volcano came out of nowhere. To some extent, we’ve seen these long-term shifts in the economy like sluggish wage growth and downward mobility. It can take some time for the economic tectonic pressure to build sufficiently—and now the volcano is erupting.” The volcanic feeling is supported by other people she interviewed, who described their situation in variously negative terms even as they are considered middle class by economists. “The American Dream is an absolute nightmare, and I just want out at this point.” “It’s really discouraging. I’m losing hope. I don’t know what to do.” “We did what we’re supposed to do—but we’re just so cost-burdened.” “It’s the most money I’ve ever made, but I still can’t afford to buy a home.” “I’ve put down roots here. I don’t want to be forced out.” How Ms. Semuels squares that sentiment with the notion the economy is great remains completely unsaid.
David Sirota, writing for The Guardian takes a similar tack, claiming that Americans merely “believe nothing is getting better,” suggesting that belief is not reality. The media, you see, has “successfully duped a chunk of voters into not believing some basic economic realities.” In his opinion, the problem is that President Biden hasn’t been bold, or rather progressive, enough. He “started out in a much different direction. Right after being sworn in, he signed an American Rescue Plan that rightly provided direct economic aid to millions of non-rich people. As poverty subsequently dropped, Biden’s poll numbers temporarily rose, seemingly halting the ascent of Republicans’ authoritarian mob. But now things have stalled, and Biden seems intent on accelerating – rather than combating – a rising tide of disillusionment.” Mr. Sirota suggests the President proceed immediately with a litany of campaign promises, from the perennial increase in the minimum wage to $15 per hour, to halting even more drilling on federal lands, to canceling student debt, to a public option for Medicare, to the costs of prescription drugs, to more labor unions. In other words, the same things progressives have been clamoring for for over a decade, yet another case of amazing how the answer to any problem is always what they wanted in the first place.
What Mr. Sirota doesn’t tell you: Even left-leaning economists believe the obvious truth that the much touted American Rescue Plan is largely or at least partially responsible for the inflation crisis. The Biden-friendly fact checking site Politifact analyzed the issue and determined that around half of our current inflation is due to the Democrats showering trillions of fresh, fake dollars on a rebounding economy after trillions had already been spent. A former member of President Obama’s Treasury Department, Steven Rattner, agrees, taking to The New York Times last year to claim President Biden was being “dishonest” when he blamed inflation on the supply chain crisis. “Blaming inflation on supply lines is like complaining about your sweater keeping you too warm after you’ve added several logs to the fireplace,” he noted. Mr. Ratner also claimed to have warned Democrats that the American Rescue Plan would lead to inflation before they passed it, and now insists we should focus on cutting the deficit to bring the economy and prices back into line. Of course, President Biden has long since moved on from blaming the supply chain crisis for our woes to blaming Russia, basically anyone but himself and his own progressive policies. The one thing that remains constant, however, is that he and his expert enablers like Greg Daco along with their supporters in the media have consistently been wrong, the entire time he’s been in office. It should be noted that this is the precise opposite of what we saw in the Trump era, when every piece of positive economic news was spun as sings of a coming crisis. Sadly, we can expect more of the same, and given the completely unexpected economic shrinkage, it seems pretty clear we have already entered Biden’s recession and the looming economic crisis I wrote about barely two weeks ago is here.