USA: That GDP Headline

CNBC: U.S. GDP fell at a 1.4% pace to start the year as pandemic recovery takes a hit

First thing we need to do is ignore the headline completely and dig into the details.

"Just tell me if it's good or bad!"

It's not that simple. The problem with any broad-based measurement like GDP is that the good stuff is hiding in the details.

Quick recap of the GDP calculation:

GDP = private consumption + gross private investment + government investment + government spending + (exports – imports)

And it's that last part that matters most: (Exports - Imports).

Take a look at this chart comparing US imports and exports 👇


Usually, the two move roughly in lockstep even as the US maintains a large trade deficit with the world (by importing more than it exports). That trade deficit has ballooned since the pandemic with imports massively outpacing exports.

Why does that matter?

Because Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

Imports, by definition, aren't produced within the country's borders. One countries' imports are another countries' GDP (the exporter).

So the yuuuuge trade deficit was a big part of the picture.

There was plenty to be positive about in the report. Demand was strong and as Jason Furman notes private final domestic demand was up 3.7% in Q1.

• Consumption: +2.7%
  Business fixed investment: +9.2%
  Residential investment: +2.1%
  

Yes, it's a negative GDP print, but the underlying economy is still strong.

However, it's also a negative GDP print, so we shouldn't just dismiss it out of hand.

We need to frame the recession talk.

A recession is defined as:

"A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Then there's a technical recession which is defined more simply as:

"Two consecutive quarters of negative GDP growth"

We're nowhere near it on the first measure, but just one quarter away on the second measure... 😜

And the data today was once again indicative of a strong economy in March.

Income & Consumption both came in above expectations.

The Employment Cost Index at 1.4% will be hot enough to keep the Fed sweating about a wage-price spiral embedding inflation in the economy.

For now, the US economy is ticking along nicely.