Does the Big GDP Miss Signal Looming Stagflation?

GDP for the second quarter disappointed, coming in at an annualized rate of 6.5%. Is this a sign of impending stagflation?

While 6.5% growth looks good on the surface, economists polled by the Wall Street Journal expected annualized GDP to chart around 9.1%. This was a huge miss and indicates the economy isn’t growing nearly as fast as everybody assumed.

Looking deeper into the numbers reveals an even gloomier picture.

Nominal GDP grew at 13%, but inflation ate away half the growth. As WolfStreet put it, “high expectations got knocked down by spiking inflation that has surprised economists to the upside all year long.”

In fact, the GDP measure likely understated inflation. It assumed a Q2 annualized inflation rate of 6.1%. But the CPI registered a rise of 9.35%. If the folks calculating GDP used the CPI as the deflator, we’re looking at annualized growth of just 3.25%. Keep in mind, the modern CPI measure understates actual price increases. As Peter Schiff noted in a tweet, using a real inflation measure would likely reveal an economic contraction.

The definition of stagflation is “a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.” We might not be there yet, but a lot of signs seem to be pointing in that direction. The fact that economic growth already seems to be slowing versus expectations should raise warning flags.

Virtually all of the Q2 GDP growth came from an 11.8% leap in consumer spending. This accounted for 70.6% of total GDP, the most ever. It was the first time consumer spending has ever made up more than 70% of GDP.

And what drove consumer spending? WolfStreet summed it up perfectly. It was “powered by the $1,400 stimulus checks that started going out in late March, extra unemployment benefits, and all the other government goodies and extras, and by stock market gains and whatnot.”

Meanwhile, gross private investment dropped by 3.5%. It was the second quarter in a row gross private investment has dropped.

We spent more but invested less. We spent money the Fed printed to buy products other nations produced. Inflation masks an imploding economy,” Schiff said in a tweet.

Schiff isn’t speculating when he says Americans are buying products produced by other nations. The trade deficit in good for June exceeded the high end of estimates and set another record, rising 3.5% to $91.2 billion.

A lot of mainstream pundits keep looking at these numbers as if they somehow reflect strength because Americans are buying so much stuff. But as Schiff pointed out, the strength of an economy isn’t measured by what you buy but by what you produce.

Strong economies produce more. They don’t simply consume more. We are consuming more despite the fact that our economy is weak. How are we doing that? Well, the Fed is printing money and we are spending it. But that does not constitute strength. That really evidences profound weakness.”

Recklessly spending money created out of thin air does not create economic strength. The only reason these numbers look good is because of Fed magic via monetary policy.

In a recent podcast, Schiff said, the economic data coming out “really evidences the stagflationary environment that we’re in.”

The big GDP miss doesn’t do anything to make us doubt Peter’s observation.