Peter Schiff: What’s Going on With the GDP?

The Commerce Department released the first estimate of Q1 GDP growth on Friday. It came in higher than expected at 3.2%.

Somewhat surprisingly, the price of gold rose on the news and the dollar showed some weakness. The primary reason was presumably lower inflation. This means the Fed still has the excuse it needs to continue the Powell Pause.

There was also some data in the Commerce Department’s report that reveals shakiness in that growth number. In fact, Peter Schiff said he thinks this will likely be the strongest growth of the year.

An increase in inventories helped drive Q1 growth. This isn’t necessarily a positive trend. It could mean that consumers aren’t buying, causing inventories to pile up. In fact, final sales to domestic purchasers increased by only 1.4%. That represents the smallest increase in more than three years.

Trade numbers also helped boost growth. Trade deficits were lower in Q1. Trade deficits were high in the last half of 2018. Peter said he thinks that’s because a lot of companies front-loaded shipments late last year in an effort to avoid tariffs.

Paul Ashworth, chief US economist at Capital Economics said, “Under those circumstances, we continue to expect that overall growth will slow this year, forcing the Fed to begin cutting interest rates before year-end.”

Peter said he thinks we just delayed the day of reckoning by a quarter.

I think this time it’s going to be the second quarter that’s going to be a big disaster. I mean, we may even get a negative number in Q2.”

In the first place, we won’t likely get positive contributions from lower trade deficits and inventories. But Peter thinks the biggest problem is going to be the inflation number. According to the government, the annualized rate of inflation was 1.7% in Q4. That was the number they used to deflate the nominal GDP and arrive at the reported number. In Q1, the annualized rate of inflation was just 0.9. That means the nominal GDP number was deflated significantly less in Q1 than in Q4 2018 giving us a higher reported GDP. Had the deflator been the same in Q1 as it was in Q4, GDP would have come in at 2.4%, which would have been pretty close to the consensus.

The question is why is inflation being reported so low? As Peter pointed out, the price of oil is up 33%. He talked about the price of oil and the impact on inflation during an interview with RT last week.

So, how do we have more inflation in the fourth quarter of last year when oil prices collapsed than we did in the first quarter of this year when oil prices surged?”

Peter said it’s possible that the price consumers paid at the pump lagged behind the drop in oil prices. In other words, consumers got the benefit of plunging oil prices in Q4 during Q1. If that’s true, they will feel the pain of rising prices next quarter.

Peter also touched on recent data on new home sales. They unexpectedly surged and many touted this as good news. But when you look more closely at the data, you find that builders cut prices. So, the news isn’t so great. If builders are having to cut prices to move inventory, it doesn’t bode well for future home construction.

Peter also offered an explanation as to why investors bought bonds and gold on what was supposed to be great economic news.

I think it’s because the markets were looking at the deflator and saying, ‘Wait a minute. There’s less inflation.’ That means there’s another reason, another excuse, for the Federal Reserve not to have to hike interest rates because inflation is below their 2% number. And I think it was that low inflation number, even though it’s clearly a transitory number based on the way it’s being calculated, but I think the market jumped on that and they bought bonds, they sold the dollar, they bought gold.”

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