The Biden Recession Is Coming

This morning, the Bureau of Economic Analysis (BEA) confirmed what many have been fearing: the U.S. economy is potentially entering a recession. The BEA’s just released advanced estimate of gross domestic product (GDP)—the value of all goods and services produced domestically—for the first quarter of 2022, which came in at a decline of 1.4% (on an annualized basis) relative to the fourth quarter of 2021. With 12-month consumer price inflation at 8.5%, the American people are suffering at the hands of the Biden Administration’s determination to flood our economy with deficit-financed cash while simultaneously undercutting the ability of the economy to produce the goods and services to meet that artificially-induced demand without steep price increases. The economy appears to be on the verge of recession, recording the first quarter of negative GDP growth since the onset of the post-pandemic expansion, coupled with the highest inflation in more than 40 years. Other than the pandemic, it is the lowest level of economic growth in our economy since the financial crisis recession of 2009.

Looking at the details of the report, personal consumption expenditures rose 2.7% in the first quarter, with all that growth coming from increases in their consumption of services. Housing and utilities, healthcare, and financial services all saw notable increases during the first quarter. With low rates of unemployment and accumulated savings from last year’s excessive government spending, consumers have returned to pre-pandemic activities, despite the overall decline in economic activity. Purchases of goods were essentially flat for the quarter.

The main problem for our economy is that the goods being purchased are increasingly generated abroad. Imports increased 17.7% (on an annualized basis) during the quarter while exports fell 5.9%. Overall, the change in our import and export activity more than offset the increase in domestic consumption. This is the inevitable result of shutting down domestic production of critical activities like energy extraction while calling upon foreign adversaries to fill the void. With the average price of a gallon of gas rising from $3.34 in the fourth quarter of 2021 to $3.76 in the first quarter of 2022, a 12.8% increase, Americans cut back on their energy purchases. Consumption of gasoline and other energy goods declined 4% during the first quarter of 2022. However, even with that reduction in their quantity of gasoline purchases, households still spent 8.5% more money on energy, with too much of that supplied by foreign sources. As we have previously noted, American consumers spending their hard-earned income on foreign oil is a drag on the economy because that money is not recirculated in the US.

As we anticipated, another drag on economic growth was the decline in private inventory investment. When the economy reopened and supply chain bottlenecks slowly resolved, companies were able to rebuild their depleted inventories and reduce the extent of the shortages Americans were encountering when they went shopping. In the third quarter of 2021, of the 2.3% economic growth that was realized, 2.2 percentage points (96% of the growth) was from inventory rebuilding. Similarly, in the fourth quarter of 2021, 5.3 percentage points out of the 6.9% GDP growth came from the change in inventories. Stated differently, had companies merely maintained their inventory growth in Q3 and Q4 2021 at the same pace they had in Q2 2021, we would have seen GDP growth of just 0.1% in Q3 and 1.6% in Q4. Now that companies are not rebuilding inventory at the pace of the second half of last year, headline GDP growth fully reflects the failed policies the American people have suffered from throughout this Administration.

The quarter does show a solid 2.1% growth in residential real estate investment. However, it is worth noting that the construction and purchases that occurred in the first quarter were largely resulting from contracts that pre-dated the large increase in mortgage interest rates—the fastest rise in nearly 30 years—that have been observed over the past few months. With 30-year mortgage rates averaging just 3.22% in the first week of January 2022, the cost of borrowing to buy a home was similar to the 2.96% rate observed throughout 2021 and the 3.11% rate observed on average during 2020. Deals entered into in January likely closed in February or March, facilitating strong sales in Q1. Due to the 40-year high inflation rates we are suffering from the Federal Reserve has raised the overnight borrowing rate by 0.25% and signaled that they would raise rates significantly over the next couple of years. Anticipating these future rate increases, the average 30-year mortgage interest rate has risen to 5.11% as of a week ago, the fastest mortgage rate increase since 1994. At today’s mortgage rates, home buyers will not be able to afford the high house prices we have recently observed; house prices rose 19.8% over the March 2021 to February 2022 period. House prices will likely decline at these higher mortgage interest rates, resulting in a slowdown in the residential housing market, causing a drag on GDP for many quarters to come.

Today’s GDP report should be a clarion call for policymakers that the economic policies of the Biden Administration and its progressive allies have failed. Despite coming to office with an economy strongly rebounding from the pandemic for eight months, miraculous vaccines from Operation Warp Speed, and remarkably fast improvements in employment following the reopening of our economy, President Biden pursued a reckless policy of paying people not to work, abandonment of energy independence, and massive government spending that has now brought us to the precipice of a recession. For the benefit of all Americans, we must change course and return to the widely shared prosperity that would result from an America First economy.

Mike Faulkender serves as a Visiting Fellow for the America First Policy Institute (AFPI).