The GDP Mirage Even as gross domestic product contracted, demand from U.S. consumers and businesses picked up
The Commerce Department on Thursday reported that GDP fell a seasonally adjusted 1.4% in the first quarter from the final quarter of last year, at an annual rate, marking its first drop since the second quarter of 2020, when the pandemic slammed into the economy.
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. (…)
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.
Meanwhile, consumer spending grew at a 2.7% annual rate in the first quarter. This was driven by a 4.3% increase in spending on services—an indication of how Americans are redirecting spending away from goods as pandemic concerns ebb, and also of how inflation, which has been most concentrated in goods, is sapping spending on some categories.
Business spending on capital equipment and the like was particularly strong, with nonresidential investment growing at a 9.2% annual rate.
For now, the stage seems set for robust growth in the quarters ahead. The job market is strong and household balance sheets are in good shape, which should fuel spending beyond inflation. Companies have ample reason to keep investing: Supply chain snarls have highlighted the advantages of bringing some production closer to home, while rising wages make purchases of labor-saving equipment seem more worthwhile.
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.
This Haver Analytics table gives a complete summary of GDP. I have highlighted the inflation component because it is the key to the future, whatever it is…
This morning, we get more details on the consumer side of the economy which we need strong and shopping merrily given poor trends in foreign trade, inventories and gov. spending, not to mention the increasingly iffy housing market.
Hoisington Investment Management points out the damage to Americans’ spending power:
Most Americans have suffered a substantial fall in their standard of living over the past twelve months. In the latest available twelve-month change, 116.2 million American wage and salary workers suffered a 3.7% decline in their inflation adjusted paychecks, the largest drop since 1980. This alone more than offsets the gain in income going to the 6.5 million newly employed in latest twelve months. In addition, salary workers suffered a larger loss in standard of living than hourly employees.
Inflationary damage to the 70 million retired Americans cannot be calculated in precise terms, but qualitatively the situation is not good. Those covered by Social Security received a 5.9% cost of living adjustment (COLA), however most private pensioners do not have COLAs. A rough estimate is that approximately 50 million or more retirees’ real income has been seriously eroded by the forty year decade high inflation rate.
Summing those whose income trailed price increases (116.2 + 50) yields a figure of approximately 170 million Americans. The sizeable adverse impact of inflation is consistent with a decline in real disposable personal income in 11 of the 13 latest months. Eighty five percent of U.S. households make under $150,000 a year, with many living from paycheck to paycheck or on steady salaries.
The imbalance between those who benefitted and those who were harmed from the monetary and fiscal policies pursued over the last two years is abundantly clear. The
8.5% inflation rate has dramatically lowered the standard of living of over 170 million individuals.When this circumstance is compared with the accomplishment of the objective by monetary and fiscal authorities to lower the unemployment rate from a recession high of 14.7% in April of 2020 to 3.6% today, the fallacy of twin mandates is abundantly clear. The lowering of the unemployment rate reflected the creation of 20.4 million new jobs. Is it a fair balance to help 20 million individuals at the expense of permanently harming 180 million? (…)
Considering the historical record of imbalance where millions of people are affected by either higher inflation or higher unemployment, the Fed has no choice but to allow the unemployment rate to rise. Higher unemployment, while harmful to some, would benefit many more millions, if inflation is contained just reversing the pattern that was experienced during the past year of accelerating inflation. Restoring real wage and salary growth, in turn, would restore positive momentum.
BTW:
Amazon Posts First Loss Since 2015 as Sales Gains Slow The tech giant has seen a shopping slump and cost increases due to inflation, labor issues and supply chain challenges, while its stake in electric vehicle maker Rivian also weighed on results.
(…) Revenue for the tech giant rose by about 7% for the January-to-March period, the slowest pace in about two decades as consumers returned to prepandemic habits and spent more money in person at stores. It lost $3.8 billion in the quarter, compared with a profit of $8.1 billion a year ago, when a surge in online orders due to the pandemic lifted Amazon’s prospects. (…)
The amount of products Amazon sold during the quarter was essentially flat from a year ago, and the company reported a 3% year-over-year drop in its online stores segment, which include product sales primarily on its flagship site and digital media content. (…)
It said it expects its operating income for the current quarter to be between a loss of $1 billion and profit of $3 billion. It posted $7.7 billion in operating income during the second quarter of 2021. (…)
Brian Olsavsky, Amazon’s chief financial officer, said Thursday the company saw about $6 billion of incremental costs during the quarter related to productivity loss, inflation and situations where its warehouse capacity exceeded demand. Mr. Olsavsky said the company is no longer constrained by labor or capacity issues. (…)
Amazon’s operating expenses in North America have been growing at a faster rate than its sales. The company had to spend billions to keep its facilities humming during the ups and downs of the health crisis. Meanwhile, the total value of goods sold on Amazon’s site in 2021 grew at half the rate it did in 2020, according to an analysis by research firm Marketplace Pulse. (…)
Amazon has worked to offset costs. The company raised the price of its Prime membership in the U.S. to $139 a year, from $119, and this month it introduced a “fuel and inflation surcharge” that averages 5% of the fulfillment fees it charges sellers that use its services. (…)
Nonstore sales jumped 54% from $67B pre-pandemic to $103B with AMZN a huge winner.
Yet, its costs have also skyrocketed as this ZeroHedge chart shows:
ZH adds: “One unpleasant highlight here: reported revenue growth of 7.3% in the first quarter, its slowest growth in about two decades. Worse, the company’s guidance to a median $118.5BN in the next quarter would be growth of just 4.8%, even lower!”
- Gary Shilling: Dismal GDP Report Raises the Odds of a Recession This Year Bloated inventories held the economy back in the first quarter and will take many months and discounting to shrink.
(…) Supply of goods will increase even as demand weakens. Some 60 ships with imports from Asia are waiting to be unloaded at the Ports of Los Angeles and Long Beach, according to the Marine Exchange of Southern California. Those “floating inventory” vessels are down from the January peak of 109, but are still about triple the earlier norm. Also, there are hidden inventories in the guise of partially-built vehicles that will hit the market when the computer chips needed to complete them arrive.
Households also hold excess inventories. While at home during the pandemic, they bought lots of exercise equipment, televisions, computer games and kitchen appliances. That pushed up spending on durable goods 18% last year. It will be years before those goods wear out. Meanwhile, look for profit-killing markdowns as businesses work off excess inventories. (…)
Decades ago, business cycles were largely inventory cycles. But inventories only exist in goods since services are consumed as produced. Now, consumer services are 61% of consumer spending, up from 39% in 1947, while goods purchases have dropped from 61% of the total to 39%. Nevertheless, inventory cycles will exist and the current one will probably speed up and intensify the business downturn I’ve been predicting to start this year.
Strong day yesterday, not so strong after hours: today’s pre-openings: AMZN: -9.8%, APPL: -3.0%, INTC: -3.5%.
Apple Says China Lockdowns Loom Over Sales The iPhone maker posted better-than-expected results for its latest quarter but warned that supply-chain disruptions remain a significant challenge.
Intel CEO Sees Chip Shortage Lasting Into 2024 The semiconductor giant’s chief executive, Pat Gelsinger, said the shortage will last longer than expected as the company reported a decrease in quarterly sales.
(…) PC shipments fell by about 5% in the first quarter, according to estimates from International Data Corp., suggesting that a two-year wave of demand might have crested.
Intel said Thursday that first-quarter sales fell almost 7% to $18.35 billion, missing Wall Street expectations. (…)
Consumer demand for lower-end PCs was particularly slow, Mr. Gelsinger said, even though corporate demand for computers remained strong.
Inflationary pressures have also affected PC demand, leading computer-makers to reduce their inventories, Chief Financial Officer David Zinsner said in a call with analysts. The division that handles chips for PCs saw sales falling 13% to $9.3 billion. (…)
The company also gave more-muted sales guidance for the second quarter against a backdrop of slower PC sales and uncertainty around the effects of Covid-19 lockdowns in China and Russia’s war on Ukraine on broader economic sentiment. If the Chinese lockdowns persist or spread, there could be a more material impact on the outlook, Mr. Zinsner said. (…)
Dallas-based chip maker Texas Instruments Inc. issued a lower-than-expected revenue forecast in its financial results Tuesday because of uncertainty in China and Europe. Mobile-phone chip maker Qualcomm Inc. exceeded Wall Street expectations with its results Wednesday. (…)
Eurozone Economy Keeps Growing but Recession Risk Looms Surge in energy prices since Russia’s invasion of Ukraine is squeezing household budgets and raising costs for businesses
(…) The European Union’s statistics agency Friday said the 19-nation eurozone’s gross domestic product—a broad measure of the goods and services produced by its economy—was 0.2% higher in the first quarter than the final three months of 2021. If that growth rate were sustained over four quarters, the eurozone economy would grow 0.8% over the year. By contrast, the U.S. economy contracted at an annualized rate of 1.6% in the first quarter. (…)
In France and Spain, big declines in consumer spending held back growth during the first quarter, reflecting the impact of Covid-19 restrictions on access to hospitality and other services that require proximity to other people, and pressure on household budgets from rising energy bills. However, in both countries, investment spending and exports continued to increase.
While France’s economy stagnated and Spain’s slowed, Germany’s economy returned to growth after contracting in the final quarter of 2021. By contrast, Italy’s economy contracted in the early months of this year, after growing in the final three months of last year.
Germany Drops Opposition to Embargo on Russian Oil Germany is now ready to stop buying Russian oil, clearing the way for an EU ban on crude imports from Russia, government officials said.
China’s Politburo Ignites Market Rally With Vows on Growth China’s top leaders promised to boost economic stimulus to spur growth.
Vows by the Communist Party’s Politburo to meet growth targets and support the “healthy” development of tech platform companies fueled a more than 5% gain in the Hang Seng China Enterprises Index. At the same time, a renewed commitment to Covid Zero raised doubts about the government’s ability to achieve its growth objectives and disappointed some investors who say the strict virus containment policy is hobbling the world’s second-largest economy.
“Covid must be contained and the economy must be stabilized,” the Politburo, led by President Xi Jinping, said Friday, according to a readout of its meeting on state broadcaster China Central Television. “We should waste no time in planning more policy tools and enhance the strength of adjustment in due course.” (…)
The Politburo’s commitment to meeting its growth target of about 5.5% for the year despite the Covid upheaval suggests stronger stimulus measures may be on the cards, including a ramp up in infrastructure spending — an approach Xi himself highlighted at a meeting earlier this week and that was reaffirmed by the leadership meeting today. (…)
The Politburo pledged to “strengthen infrastructure construction in an all-around way” and to support the housing market. While officials repeated the phrase that “houses are for living in not for speculation,” the government said it would also work to meet the demand for better quality housing and “optimize” the supervision on developers’ income from project pre-sales.
There was also a shift in language on internet platform businesses, a sign of possible easing of a regulatory crackdown on the industry. China’s top economic official Liu He in March called on regulators to “steadily advance and complete as soon as possible the rectification of large platform companies.” The Politburo dropped the words “steadily advance” and “as soon as possible” from its guidance, and added that “specific measures to support the regulated and healthy development” of the firms will be introduced. (…)
As Mike Tyson said, you have a plan until you get punched in the face. China has had many plans in recent years, none remain.
Robinhood Reports 43% Revenue Decline
(…) Robinhood’s monthly active user count fell 10% to 15.9 million in March, from 17.7 million in the same month of 2021. (…) Robinhood’s transaction-based revenues fell by almost half to $218 million from $420 million. (…)
In the second quarter of 2021, Robinhood said crypto trading totaled $233 million, more than half its transaction revenue. However, in the latest quarter that figure fell to $54 million. (…)
The current market, marked by rising interest rates and falling asset prices, has made investors more cautious, Mr. Warnick said. They are trading less and in smaller amounts, he said. “They’re certainly paying attention to the macro environment,” he said. (…)
Really?
One of Cathie Wood’s Top Stock Picks Just Plunged 40% Cathie Wood’s ARK Investment Management is the largest shareholder in Teladoc Health, which suffered its worst trading day on record Thursday after slashing its financial outlook.
(…) But Teladoc said late Wednesday in its quarterly earnings report that its financial outlook had dimmed for the rest of the year amid higher advertising costs and slower than expected sales growth. The digital health industry has also grown increasingly crowded. (…)
Alarmed by Russia’s Invasion, Europe Rethinks Its China Ties
(…) Senior lawmakers in Berlin who now concede that such closeness to Russia was a historic liability are starting to see the danger of repeating the mistake with another authoritarian regime, raising alarm bells over Germany’s status as Beijing’s largest European trading partner.
Nations in central and eastern Europe are casting fresh doubt on the wisdom of the so-called 16+1 forum with China. Italy has just strengthened its veto power against foreign takeovers, a measure directed at China.
At the European Union level, attitudes have soured over Beijing’s refusal to condemn Russia’s invasion and its attempts to undermine the transatlantic unity the war fostered. A virtual EU-China summit on April 1 took place in the context of what a person familiar with the discussions described as an increasingly challenging relationship. (…)
The pandemic and Europe’s realization that it relied on China for basic medical supplies was the wake-up call; Russia’s war on Ukraine bolsters the argument that Europe must reduce its dependence on Beijing, the diplomat added. (…)
A third of [German companies] respondents said they expected to put planned business or investments on hold, while 46% saw a decrease in the attractiveness of the Chinese market. Some 10% said existing business might be moved out of China, and 27% said they expected diversification to accelerate in Asia. (…)
For Joerg Wuttke, who heads the EU Chamber of Commerce in China, “the kind of public image of China when it comes to Ukraine is really making a difference.” Taken along with its Covid Zero policy and the associated disruptions to business, “what really matters now is the perception of China becoming unreliable,” he said, calling it a “new dimension.” (…)
A Chinese diplomat was dispatched to the region last week, fanning speculation that others may now be considering a way out. She was met by a warning from the Czech government that China’s endorsement of Russia would hurt its relations with the whole EU. (…)
German Finance Minister Christian Lindner, speaking at the Ludwig Erhard Summit last week, said that Berlin needed a whole new business model to reduce its economic reliance on China. (…)
