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OPINION: The recession could be here

By Robert Romano


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.” 

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