New Numbers Confirm Inflationary Recession (Stagflation)
Yesterday's GDP report indicated that the headline volume growth number stayed unchanged at +0.6%, and the terms of trade adjusted real growth number also stayed unchanged at -0.6%. Domestic demand was revised down but so was the trade deficit, leaving production unrevised.
However,other revisions were clearly bearish. Inflation was revised up with both the GDP deflator and the domestic demand deflator being revised up with 0.1% point each while the Personal Consumption Expenditure deflator was upwardly revised by 0.2%:points. Meanwhile, disposable income was revised down even in nominal terms and much more so in real terms.
Today we got the monthly breakdown on that downward revision, with most of it coming in November and December. Real disposable income rose slightly in January, but this was entirely a result of temporary factors such as expired options and other bonuses. Despite these factors, real disposable income remains 0.2% below the September peak, confirming the beginning of a recession during the fourth quarter of 2007. This is likely to become even clearer after these numbers have gone through the annual revision in late July. These revisions always result in a downward revision of real growth and an upward revision of inflation. For example, the real growth rate for 2004 was initially reported as 4.4% while the GDP deflator was reported to rise 2.1%. After the 2007 annual revision it was said that growth was only 3.6% while the GDP deflator is said to have risen 2.9%.
With consumer price inflation soaring and nominal income growth likely remaining slow, this implies that real income will likely fall faster in coming month (also in February, the removal of the temporary factors that boosted the January number will also contribute to a deeper monthly decline. And with the savings rate being negative and asset prices falling, this will also imply a decline in personal consumption which in turn will contibute to faster declines in terms of trade adjusted real GDP.