All the bickering over the formal definition of a “recession” misses one crucial detail. GDP numbers are published in real terms, which means they already factor out the impact of inflation. And as hot as inflation is, what looks like a boom on paper turns miserable fast.
Just look at the numbers that allegedly spooked Wall Street this morning. In current dollar terms, GDP jumped another 8.5% over the past year, adding a healthy $508 billion to the economy last quarter alone.
That’s as hot as it gets. Even if this was China a decade ago, people would be cheering and incredulous at the economic miracle unfolding. But that’s not the number that gets reported.
What we see is the number that adjusts for 8.5% annualized inflation. At best, factoring weaker purchasing power like that out of the GDP calculations suggests a stall. The way the government does it, we end up with a 0.6% annualized decline.
Between that number and a 1.6% down trend in the first quarter, we’d be looking at a formal recession already . . . if prices were anywhere near stable. The post-COVID boom created inflation and generated a lot of additional economic activity.
That’s what the Fed is working hard to take away now. We don’t enjoy watching everyone in the economy work 8.5% harder just to keep up with the bills. That’s extreme and unsustainable.
I’m hoping we hit a happy middle ground soon . . . somewhere that the boom recedes and takes price pressure with it, leaving us with reasonable current dollar growth of 2-4% and inflation taking about 2% a year away.
But for now, that’s why this environment is so unusual. The Fed sees it. No conventional recession normally features either rising corporate profits or declining unemployment benefit claims.
On paper, profits are booming. They just aren’t rising as fast as inflation. And as long as the numbers move up on paper, corporate managers who are still struggling to hire good people are not going to cut payroll.
Like us, they need to run harder to keep up. And until something changes, we’ll live in a boom that feels like recession . . . or a recession that looks like a boom.