Inside the Economic Numbers: Despite Growth, Significant Headwinds Remain

Yesterday’s GDP release continues to show that the American economy is recovering from the COVID pandemic, largely thanks to the Trump Administration’s success with Operation Warp Speed of realizing three vaccines within a year of the onset of the pandemic and the quick implementation of fiscal aid from the CARES Act. The pandemic recession was by far the shortest on record, and the economy continues the expansion that began in May 2020.

However, as the Wall Street Journal noted this morning, “Growth would be healthier if Biden had done nothing in 2021.” Even The New York Times recognizes that the economy under Biden has not been great. While the American people continue to demonstrate resilience in the face of the pandemic and its economic fallout, the failures of the Biden Administration and its allies at the Federal Reserve have set up our economy for a rough beginning of the year. Yesterday’s report and earlier data on the current state of the economy demonstrate that significant headwinds will impact GDP growth in the first quarter of 2022.[1] Here are some of the issues:

1. Nominal retail sales growth for November was only 0.2%, and it fell 1.9% for December. These retail sales numbers are not adjusted for inflation. Over those same two months, prices increased an average of 0.8% in November and another 0.5% in December. That means that once inflation is incorporated, both months were negative in real terms (recall that GDP is measured in real dollars). Since consumption represented 68% of GDP in the last quarter, the fact that we are beginning with a decline indicates a sluggish quarter lies ahead.
2. Adding to these concerns, the peak impact of the omicron variant was realized in December and January. This indicates that consumption expenditures likely will remain flat, if not decline, in Q1. In addition, heightened sick days by millions of American workers will probably have supply chain implications for months to come.
3. Of the 6.9% growth for the quarter, 4.9% of it was from rebuilding inventories as some supply chain issues eased. Inventories increased by $224.7 billion on an annualized, seasonally-adjusted basis in Q4. Because the calculation of GDP uses the change in inventories, any growth less than $224.7 billion in the next quarter will negatively contribute towards Q1 GDP growth.
4. Now that Chairman Powell has been renominated, the Federal Reserve has removed the word “transitory” from its lexicon when discussing inflation and has signaled that it will finally begin combating inflation by returning to normal monetary policy. Unfortunately, they are behind the curve, requiring a rather fast reversal, which has led to a financial market selloff. According to interest rate markets, five interest rate increases are expected this year. These rate increases will further dampen consumer spending and reduce residential real estate activity.
5. Even with the failure of the Big Government Socialism Bill, Liberals in Congress are still looking to use reconciliation to raise taxes, disincentivize work, and continue the excessive spending that has already generated the highest inflation rate in 4 decades. Couple that with nominees to places like the Federal Reserve who want to shut off entire sectors of our economy, and we will see reduced investment results.
6. This morning, the University of Michigan released its latest consumer sentiment survey results. The survey showed that sentiment fell nearly 5% in January to its lowest level since November 2011. If consumers feel uncertain about the economy and their own financial condition, they will pull back on consumption and investment.
7. Finally, the trade number in the report is of significant concern. Americans saw large increases in personal income from waves of fiscal policy support during the pandemic. However, if we combine massive government spending with a shutdown of the domestic production of things like energy, the positive GDP benefit from spending government stimulus is offset by the decline in net exports. According to yesterday’s report, net exports (seasonally adjusted and annualized) went from -$798.4 billion at the end of 2020 to -$962.6 billion at the end of 2021. In other words, the United States net imported an extra $164 billion of goods and services in Q4 2021 (annualized) than a year earlier. Instead of begging OPEC to sell us more oil, we should be generating it domestically so that economic activity enriches Americans, not the Russians or Iranians.

Policies that constrain the supply of workers and materials, ongoing talks of ever-higher taxes and regulation, failure to prepare for new variants of COVID, and the politicization of the Fed are all headwinds confronting our economy this quarter. What we need now is a renewed focus on removing the supply-side barriers that are holding back our full recovery and a return to the Federal Reserve focusing on its legislative mandate of stable prices.