This week, the Bureau of Economic Analysis (BEA) released its second stab at calculating the Gross Domestic Product (GDP) equation for the 1st Quarter of 2022. It seems things were slightly worse than previously announced, as the estimate fell from (1.4%) to (1.5%). Obviously, negative signs or brackets around GDP numbers aren’t desirable.
However, with the never-ending dark clouds we have been having this news cycle, I have decided to find some silver linings. Believe it or not, it isn’t all that hard to find them. You just have to want to do so, and I do.
Allow me to cut to the quick: last quarter’s GDP was not as bad as the headline suggests. There, I have said it. What’s more, I mean it. Consider this, line 41 of Table 1 of the report is “Final sales to private domestic purchasers.” This would be what the private sector consumed, and it grew at an 11.8% annualized clip during the quarter. The BEA estimated inflation was around 8.1%, so it would seem the private sector’s consumption grew at a 3.7% rate.
Voila. There is a silver lining. However, it isn’t intuitive, is it? How can the economy grow and shrink at the same time? It is all in how the government calculates the number.
First things first, our trade deficit mushroomed during the quarter. Imports increased at a $160.5 billion equivalent, and exports shrank $32.9 billion. As a result, the ‘net exports of goods and services’ component of the equation took $193.4 billion off the total. This resulted in our trade deficit shaving 3.23% off the overall equation when adjusted for inflation.
That is how the math works, but is right? That is a great question. Essentially, consuming more than we produce is detrimental to the equation. But is it really? After all, this would suggest children and retirees are detrimental to the US economy because they consume more than produce, almost by definition. However, that doesn’t make any sense either. Further, many of our imports are actually from foreign subsidiaries of US corporations.
This is important, as the GDP equation favors production over design.
After all, if a company in Nashville designs a better mousetrap and produces it in China for the US market, this will cause our trade deficit to increase. That is bad for GDP, right? Well, the profits and the high-paying jobs stay in Nashville. Further, what is the true value of a product? The labor? The physical product itself? Or is it the technology and design which produces a desired outcome. Think about it. What is the value of a mousetrap for peeling grapes? Zero, right? Still, the labor used and physical product haven’t changed. Think about it.
As such, an increase in our trade deficit isn’t necessarily always an indication of economic contraction. Counterintuitively, it could suggest quite the opposite IF it means American workers are focused on more value-added functions. How is that for a “say what” statement?
Then, there is the curious issue of line 40 in Table 2: “change in private inventories.” This segment of the economy, if you want to call it that, took 1.09% off of the GDP equation. Whew. We must have really blown through some inventories, huh? Surely, inventories would have had to subtract if they were a drag on the economy. That is what one would assume. Am I right?
One word: WRONG.
Private inventories actually INCREASED during the 1st Quarter at a $149.6 billion rate. However, they had grown at a $193.2 billion pace during the 4th Quarter of 2021. As such, the BEA subtracted the $43.6 billion difference from the GDP equation.
For all intents and purposes, inventories both grew and shrank during the quarter. At least that is how the BEA views the world. However, it makes the rules, calculates the data and what it says goes.
Obviously, very few people go to the trouble of dissecting GDP reports. This is because most folks find that sort of thing nerdy, behind boring and something of a waste of time. Fair enough. However, I suppose someone has to do such things in order to parse the truth out of arcane government documents, and it might as well be me. What is the old adage? “If not now, when? If not me, who?”
I suppose so.
In the end, sometimes there really ARE silver linings in the dark clouds. This week’s’ GDP was one of those dark clouds, and I believe I have found some silver linings. No, the most recent report wasn’t awesome, but it also wasn’t as dreadful as the headlines made it appear. The truth is usually somewhere in the middle, where it usually is.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows not only on this day but on every day, and thank you for indulging me this week.
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.