The Message In The Q1 GDP Shock: Massive Windfalls For The 1%; Hardly 1% Growth For The Masses

The Q1 GDP print at -2.9% was the fourth lowest (out of 120 quarters) since Ronald Reagan declared “morning in America” in early 1984. But the true results were probably far worse—unless you believe that the annual rate of inflation this past winter was an anemic 1.27% per the BEA’s deflator for GDP. Even the medicated CPI-U index clocked in at 1.8% during Q1 and is now running north of 2%. Likewise, food was up at a 2.1% annualized rate during Q1, rents and medical care were each up at a 3% rate, and consumer energy prices were rising at a 5% annualized rate.

So based on actual inflation, the Q1 GDP number was negative 3-5% at best. Moreover, if you use a non-governmental measure of inflation, such as the Billion Prices Project (BPP), the picture is even more foreboding. As the Consumer Metric Institute noted, based on the BPP inflation of 3.91% in Q1, real GDP would have clocked in at a deep, recessionary -5.6%. 

Consumer Metric Institute: And lastly, for this report the BEA assumed annualized net aggregate inflation of 1.27%…CPI-U index…was over a half percent higher at a 1.80%…the Billion Prices Project (BPP — which arguably reflected the real experiences of American households…) was over two and a half percent higher at 3.91%….If we were to use the BPP data to adjust for inflation, the first quarter’s contraction rate would have been an horrific -5.62%…

Yes, there was a 1.7% hit to Q1 GDP owing to drastically slower inventory accumulation—-in effect, a payback for the inventory swollen GDP gains reported in the final two quarters of 2013.  Yet, set inventory aside and here’s the true “recovery picture. GDP based on real final sales in Q1 was up just 1.5% from the year ago quarter, and is up at a tepid 1.6% CAGR  during the four year period since Q1 2010.

That is not escape velocity. These figures also reflect no recent “acceleration”, and certainly scant impact from the $3.5 trillion expansion of the Fed’s balance sheet since the fall of 2008. And even this tepid rate of final sales gain was posted by the BEA based on a GDP deflator rate of only 1.6% over the four year period.

That just isn’t credible based on the far more robust inflation trends in what people buy. In fact, the actual inflation over 2010:1-2014:1 could easily be 2.2%—or approximately what was posted for the CPI. That would mean, in turn, that real GDP has expanded at a tepid 1% rate over the last four years.


In short, Fed policy has produced massive gambling wins in the risk asset casino for the 1%, but hardly a 1% economy for the masses.