GDP, Inflation, and Q1 2011

The Government has released the first estimate of Q1 2011 GDP and its details.

In summary it states:

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.8 percent in the first quarter, compared with an increase of 2.1 percent in the fourth. Excluding food and energy prices, the price index for gross domestic purchases increased 2.2 percent in the first quarter, compared with an increase of 1.1 percent in the fourth.

Real personal consumption expenditures increased 2.7 percent in the first quarter, compared with an increase of 4.0 percent in the fourth. Durable goods increased 10.6 percent, compared with an increase of 21.1 percent. Nondurable goods increased 2.1 percent, compared with an increase of 4.1 percent. Services increased 1.7 percent, compared with an increase of 1.5 percent.

Real nonresidential fixed investment increased 1.8 percent in the first quarter, compared with an increase of 7.7 percent in the fourth. Nonresidential structures decreased 21.7 percent, in contrast to an increase of 7.6 percent. Equipment and software increased 11.6 percent, compared with an increase of 7.7 percent. Real residential fixed investment decreased 4.1 percent, in contrast to an increase of 3.3 percent.

Real exports of goods and services increased 4.9 percent in the first quarter, compared with an increase of 8.6 percent in the fourth. Real imports of goods and services increased 4.4 percent, in contrast to a decrease of 12.6 percent.

Real federal government consumption expenditures and gross investment decreased 7.9 percent in the first quarter, compared with a decrease of 0.3 percent in the fourth. National defense decreased 11.7 percent, compared with a decrease of 2.2 percent. Nondefense increased 0.1 percent, compared with an increase of 3.7 percent. Real state and local government consumption expenditures and gross investment decreased 3.3 percent, compared with a decrease of 2.6 percent.

The change in real private inventories added 0.93 percentage point to the first-quarter change in real GDP after subtracting 3.42 percentage points from the fourth-quarter change. Private businesses increased inventories $43.8 billion in the first quarter, following increases of $16.2 billion in the fourth quarter and $121.4 billion in the third.

Now we can look at some of the details. Remember that GDP or Y is:

Y=C+G+I+Ex-Im

First, it is worth a quick look at the Monetary Base. It may be useful to read our paper from mid 2009 on the Monetary Base as a refresher. The FED has done QE1 which we see with TARP gave rise to the first bump up and then did QE2 with the second recent bump up. This is simply the printing of money.

Now we show M2 and the MB. Note that QE1 has leaked out into the M2 flow, the lag being almost a year. We see the start of QE1 in later 2008 and we see the rise in M2 a year later. Slow but there it is. We expect a similar rise in M2 after QE2. Remember that M2 will drive inflation.

Using classic economic theory we can calculate the inflation based upon GDP, M2 and the velocity. This is shown above. We see a 2% pa rate based upon the past data. Remember this is past and the spikes in M2 will be significant.

The above shows the details in this calculation. V has decreased a bit which means that people are really not turning their money over as quickly.

The above shows PPI and CPI. The major concern is PPI increases, a leading indicator. We show the present changes below.

The above is the worrisome chart. We see a steady rise in PPI and a 6 month moving average annualized rate of increase of 10%. Now the CPI is at 5% but it is a lagger. Our concern is that:

1. The GDP backward looking inflation of 2% is deceptive since the MB is lagging in terms of the M2 impact.

2. PPI is a leading indicator and quarter to quarter fluctuations are acceptable but 6 month moving averages with 100% increases are quite worrisome.

3. CPI is a lagger and we expect it lags the PPI by a year at times. This means that we can expect a 10% inflation rate in the summer of 2012.

Interesting.