The euphoria with the fourth quarter Gross Domestic Product (GDP) figure makes no sense.
The headline champions say that real GDP increased at an annual rate of 3.3% in the fourth quarter of 2023, according to the Bureau of Economic Statistics (BES). An increase in real GDP of $1.5 trillion with an increase in public debt of more than $2 trillion is not a strong economy. It is a bloated economy. Furthermore, there is nothing positive in consumption when personal saving as a percentage of disposable personal income was only 3.7% in December and disposable personal income in 2017 has basically stagnated. American consumers are buying fewer things with their salary.
We cannot forget that one of the biggest drivers of the fourth quarter increase in real GDP was an abrupt reduction in the GDP deflator, which came at 1.5%, less than half the previous reading of 3.3%. This is a massive boost to real GDP from a reduction in the inflation estimate that most Americans have not seen at all.
Credit card debt is at an all-time high, and Americans are taking longer to pay their balances. The percentage of Americans who are in financial distress due to credit card debt has reached the same level as during the Great Recession, according to the Federal Reserve Bank of St. Louis report “Share of Americans in Financial Distress Reaches High Levels” (December 26, 2023, J. M. Sanchez, M. Mori).
The evidence of real economy stagnation is also clear in the Gross Domestic Income figure, which shows why U.S. citizens see the economy in recession when official real GDP tells us a different picture. The annual growth of real gross domestic income, with the latest figure, stands at -0.1%. The BES will not publish the fourth quarter until the next GDP revision, but if previous trends continue, the real GDI may continue to signal recession.
The same happens with inflation.
Market participants and the government may consider that the data on PCE inflation is hugely positive, but if we look at non-replaceable services, shelter in particular, these are rising above 5%.
The above-mentioned figures may seem like a dream to any eurozone citizen, where real GDP is in recession even with the massive Next Generation EU fund and all fiscal rules eliminated. However, U.S. citizens must understand that the path of its economy only leads to stagnation. If you follow European policies, you get European stagnation and elevated unemployment.
The lesson is that so-called “public stimulus” always means more debt, which in turn means more taxes, lower growth, weaker real wages for families, as well as a tougher environment for small businesses.
It is no surprise to read that six out of ten people polled by CBS News said they rated the economy as “fairly bad” or “very bad.” U.S. economic policy is increasingly detached from small businesses and families, those who feel the negative effects of inflation and subsequent rate cuts. While the size of government in the economy rises, aggregate figures seem further away from the reality that Americans live in. In Europe, it is the same: governments cheer aggregate GDP and annual inflation changes, while the average citizen sees the purchasing power of salaries decline rapidly and the ability to make ends meet more complicated. Small businesses feel the destruction of margins when inflation soars and suffer twice as much when rates rise because the entire burden of monetary policy expansion and contraction is imposed on the shoulders of the average worker and small entrepreneur.
It is important to remember that this dire situation for the majority comes after an unprecedented chain of monetary and fiscal stimulus plans imposed under the message of redistribution and helping the middle class, when reality shows that financial repression, massive government size, and bloated debt are destroying the middle class while aggregate figures tell them they should be grateful. Policies that have never worked are being implemented at an astonishing pace and with enormous levels of money printing and debt, and the government blames anyone except themselves for poor consumer and business confidence. This is not a strong economy. Deficits and massive debt will mean more taxes, fewer opportunities, weaker real wages, and weaker growth in the future. I come from the euro area, and I know it. I come from the future of America if it continues down this path: stagnation and elevated unemployment.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).