The size of the catch in a fisherman’s tale tends to grow as it ages. A 20-inch blue fish will stretch to three feet or more after a few years.
The U.S. economy in the first quarter is like that but in reverse. The government said on Thursday that the economy shrunk more in the first quarter than it initially estimated. Gross Domestic Product contracted by 1.52 percent after adjusting for inflation, rather than the 1.42 percent reported by the Commerce Department in its first estimate last month.
One of the drivers of the revision was the larger estimate for the trade deficit. The combined goods and services trade deficit was $1.5435 trillion at an inflation-adjusted annual rate, 0.12 percent higher than the preliminary estimate. That is a new record high. As Alan Tonelson points out on his RealityChek website, this is the seventh consecutive all-time high for the quarterly trade deficit. Tonelson also points out that if the trade deficit had merely stayed even with the stratospheric level of the fourth quarter of last year, the economy would have expanded by 1.7 percent.
The Commerce Department also lowered its estimate for private inventory investment and housing investment. Private inventories were initially estimated to have grown at an annual rate of 2.1 percent. This was downgraded to a mere 0.4 percent. The Commerce Department said that this was led by a decrease in wholesale inventories, primarily motor vehicles. In other words, the supply chain problems that have hampered automakers and pushed used car prices sky high are dragging down GDP.
Growth in private residential investment—which is Commerce Department lingo for spending on home building and improvement—was quite a bit lower than the preliminary report, going down to just 0.4 percent from 2.1 percent. This is consistent with the inflation-driven slowdown that is now very apparent in homebuilding and new homes sales. Prices for building materials and labor have been driven so high that they are destroying demand.
Those downward revisions were somewhat offset by an upward revision in personal consumption expenditures from 2.7 percent growth to 3.1 percent. Spending on durable goods grew at an inflation adjusted annual rate of 6.8 percent, up from the first estimate of 4.1 percent. The growth of services spending was revised up from 4.3 percent to 4.8 percent. Nondurable goods spending, however, was revised down to a minus 3.7 from the preliminary estimate of minus 2.5.
Consumer Sentiment and the Midterms
The preliminary May reading of consumer sentiment saw the University of Michigan’s index drop to 59.1, the lowest reading since the summer of 2011 when the country was locked in a battle over the debt ceiling and Standard & Poor’s had downgraded the U.S. credit rating. Consumers’ views of both current conditions and future conditions deteriorated sharply. The final read, due out Friday morning, is expected to hold at that low level, although gas prices hitting new records day in and day out could push it lower.
The depressed state of the consumer is a reflection of how heavily inflation weighs on the American psyche. Rapidly rising prices have completely overwhelmed the good news in the labor market. Jobless claims are low, unemployment is low, and jobs are plentiful—and everyone is miserable about today and pessimistic about tomorrow.
This poses a serious problem for the Democrats as we approach the midterm elections. We like to think of consumer sentiment as the real political approval rating. Worried or disappointed consumers are likely to vote against the incumbent party to express their desire for a new direction.
Biden should be very happy he’s not up for re-election. The last three times an incumbent president was thrown out of office —Trump, Bush, and Carter—coincided with the cycle lows in consumer confidence.
Recession When?
The consumer sentiment number may provide a clue about whether we will sink into a recession this year or next year. Until we saw the data from the regional Federal Reserve banks and the housing market that came out over the past two weeks, we were firmly in the 2023 recession camp. Now we’re less certain. A further decline in consumer sentiment could tip the scales toward an earlier recession. As we saw in the first quarter GDP data, the economy has been kept afloat by strong consumer spending. If inflation finally breaks that, it’ll be time to strap on the lifejackets and get ready to swim with the fish.