U.S. Economy Expanding by 1.5%, But Inflation Is 3-5%

The Bureau of Economic Analysis (BEA) reported June 25th that the U.S. GDP in the first quarter of 2014 was a dismal -2.9%, despite unemployment being unchanged and personal income growing at a healthy 3.2% annual rate. According David Stockman, Director of the Office of Management and Budget under President Reagan, this was the 4th worst out of 120 quarterly reports since the “Gipper” was president.

But do not let these dismal numbers get you depressed. GDP based on “real final sales” between January and March grew by 1.5%, about the same dreary compound annual growth rate of 1.6% that America has suffered through since the beginning of 2010.

Economics is called the dismal science because economists do not see the world in the same way as workers and small business people. If a shop sells its merchandise and cannot get resupplied from a sold-out manufacturer, economists see this as a contraction of GDP. If an economists sees U.S. companies moving manufacturing back to the U.S., they see this as a decline in productivity. This has all to do with accounting issues, rather than the real pace of business.

The revised first quarter report took a -1.7% hit because of a shrink in inventories. It is my belief that a significant amount of manufacturing is coming back to the United States to benefit from cheap American energy costs, which are about one third of global rates. It is much easier for a U.S. company to cut the cost of carrying inventory by having a factory down the street versus 10,000 miles away in Asia. It is also believed that inventory had an extraordinarily large increase in last year’s third and fourth quarters.

The BEA calculates real Gross Domestic Product (GDP) growth by subtracting inflation. BEA used an inflation rate of only 1.27%. But as David Stockman points out, this is below the Consumer Price Index for Urban Consumers that was running at 1.8% during first quarter and is now running about 2%. Annualized costs in the first quarter for food were up by 2.1%; rents up 3%; medical care up 3%, and consumer energy prices leaped by 5%. Based on actual inflation, GDP could have been down by -3% to -5%.

Milton Freidman won the Nobel Prize for Economics with the simple statement “inflation is always and everywhere a monetary phenomenon.” What he meant is the amount of money in the economy will directly impact prices paid. The more money the Federal Reserve pushes out into the economy, the higher the inflation.

Individuals and especially people on fixed incomes hate inflation because everything they want to buy costs more. But government economists love inflation because they imbedded into the tax code a progressive structure that taxes inflated incomes at higher and higher percentages. That is why the federal government expects to collect all-time record tax amounts this year.

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