U.S. economy contracts 1.4 percent in Q1 amid crushing inflation

Well, that didn’t take long. It has only been a month since the spread between 10-year treasuries and 2-year treasuries in the bond market inverted on March 31. That has been a reliable recession indicator that has predicted almost every recession in modern economic history.

Now, here we are, and the first quarter gross domestic product (GDP) has contracted 1.4 percent on an inflation-adjusted, annualized basis, according to data compiled by the U.S. Bureau of Economic Analysis (BEA). The economy is overheating. If the same thing happens in the second quarter, the U.S. economy will officially be in another recession, shortly after the brief 2020 COVID recession.

Usually, it takes on average about 14 months until a recession follows such a bond-market inversion, but again, that’s just on average. Sometimes, the inversion occurs when the recession has already started. Sometimes, the recession happens two years after the inversion. Only in hindsight do we find out which.

So, is this the recession right now? Here are a few indicators to keep your eyes on.

In the BEA’s GDP report, it should be noted that the economy did grow on a nominal basis by 6.5 percent annualized, by $382 billion to $24.4 trillion.

It’s just that with consumer inflation at 8.5 percent and producer inflation at 11.2 percent, rising prices more than offset the nominal growth. The same thing happened in the 1970s and early 1980s, with monster nominal GDP gains that were more than offset by double-digit inflation.

Similarly, exports nominally increased by $69 billion, but with the inflation adjustment, on the so-called real GDP, they decreased by $36 billion. Federal-government spending was nominally about the same each quarter of 2021, and again in the first quarter of 2022, at $1.57 trillion, but after adjusting for inflation fell by 1.5 percent.

How GDP is adjusted for inflation is important to understand, because it is one of the few accountability mechanisms that the American people have against a spendthrift federal government, which would prefer to conceal the terrible impacts of inflation on American working families as real wages are getting crushed.

Note that as a result of the inflation, real earnings are down 2.7 percent over the past 12 months, according to the Bureau of Labor Statistics. And it’s little wonder.

Congress spent and borrowed about $6 trillion to fight COVID after January 2020. That included the $2.2 trillion CARES Act and the $900 billion phase four legislation under former President Donald Trump, as well as the $1.9 trillion stimulus and $550 billion of new infrastructure spending under President Joe Biden.

As a result, the national debt has increased by $7.2 trillion to $30.4 trillion since January 2020, of which the Fed monetized half, or $3.4 trillion, by increasing its share of U.S. treasuries to a record $5.7 trillion while the M2 money supply has increased by $6.4 trillion to $21.8 trillion, a 42 percent rise in that same timeframe. 

The supply-chain crisis is absolutely playing a role in the inflation. That is why having the Congress spend so much money and the Federal Reserve print so much money — especially after the economy was already largely reopened by the end of 2020 — was an unforced error. It was literally Milton Friedman’s “too much money, chasing too few goods.”        

Robert Romano is the VP of public policy at Americans for Limited Government (ALG). The organization says it is a “non-partisan, nationwide network committed to advancing free-market reforms, private property rights, and core American liberties.” 

The question of America’s role in the world is central to U.S. foreign policy, and we have debated it since the nation’s founding. Russia’s war against Ukraine has brought new urgency to the question. 

The U.S. has rightly taken a leading role in responding to Russia’s invasion with economic sanctions and other measures. We are providing humanitarian and military aid to Ukraine and welcoming Ukrainian refugees. Importantly, we are working together with allies, especially the NATO alliance. 

These actions have broad public support. While some Americans worry about a larger conflict with a nuclear-armed Russia, many think we should be doing more to help. In general, the American people agree the U.S. should be a leader in the effort. 

Apart from responding to crises like Ukraine, however, Americans often disagree about what our role in the world should be. We have had serious, impassioned debates about this matter throughout our history, and our answers have evolved. Circumstances changed, and our beliefs and policies changed with them. 

As I have noted before, you can get a sense of this from statements made by our presidents. George Washington said the United States should have commercial relationships with other countries but “as little political connection as possible.” Thomas Jefferson called for peace and commerce with all nations but “entangling alliances with none.” John Quincy Adams expanded trade agreements but declared that America “goes not abroad in search of monsters to destroy.” 

By the 20th century, the monsters couldn’t be ignored. Woodrow Wilson said the U.S. would enter World War I for the world to “be made safe for democracy.” Franklin Delano Roosevelt, gearing up for World War II, contended that the U.S. would be “an arsenal of democracy.” Ambitious claims about America’s role continued through the Cold War. John F. Kennedy said America would “pay any price, bear any burden, meet any hardship … to ensure the survival and success of liberty.” Bill Clinton argued that America “stands alone as the indispensable nation.” George W. Bush contended that our objective should be “ending tyranny in our world.” 

We haven’t always lived up to our high ideals and ambitious goals, however, and foreign-policy failures have diminished Americans’ appetite for intervention. Vietnam came to be seen by many as a mistake. In Iraq, we quickly ousted Saddam Hussein, but stable government was elusive. Our 20-year engagement in Afghanistan ended as it started: with the Taliban in control. 

Exercising world leadership isn’t easy or cheap, and the American people have a huge stake in the decisions we make, because they will pay the price — in dollars spent and, sometimes, in lives lost — as those conflicts demonstrated. 

The United States is the world’s economic, military and cultural leader, and that preeminence is the reason we have these debates about America’s role. Our power may not be unchallenged as it was after the fall of the Soviet Union — China’s influence is growing — but we still shape the global order more than any other country. The world looks to us to lead. I have attended many high-level international meetings over the years, and I was always struck by how other nations looked to the U.S. for leadership, especially in times of crisis. 

We obviously can’t solve all the world’s problems. We need to always center American interests and act in accordance with American values; and it’s essential that we work our allies, not unilaterally. 

But the crisis in Ukraine has brought home that the world needs leadership, and the U.S. is uniquely positioned to provide it. We can’t avoid the role of world leadership, and we shouldn’t want to either.       

Lee Hamilton, 91, is a senior advisor for the Indiana University (IU) Center on Representative Government, distinguished scholar at IU Hamilton Lugar School of Global and International Studies, and professor of practice at the IU O’Neill School of Public and Environmental Affairs. Hamilton, a Democrat, was a member of the U.S. House of Representatives for 34 years (1965-1999), representing a district in south-central Indiana.