How Inflation Jump Skews Short-Term GDP, Labor, Trade Metrics
How Inflation Jump Skews Short-Term GDP, Labor, Trade Metrics
In the first quarter of 2022, U.S. productivity dropped as real gross domestic product (GDP) fell for the first time since the beginnings of the pandemic. A May Bloomberg story attributed the drop, the “largest since 1947,” to an increase in labor costs and a growing trade deficit. Another expert quoted in Fortune associated the drop to the decline in GDP and growing imports.
The recent growth in inflation is supposed to correlate with higher production as more capital in the economy should spur more investment in production. The combination of rising inflation with low production would be akin to stagflation—the period in the 70s of high inflation and low production that was ascribed to a failure of the economic theory of the time and that cheap money was only encouraging laziness.
But metrics showing a decline in production are skewed because of the sudden surge in inflation. Without adjusting for inflation, productivity metrics are similar to what they were last quarter.
Usually, the inflation adjusted values are the more accurate metric, especially when comparing historical values. The determiner of inflation, the consumer price index (CPI), is an estimate based on Bureau of Labor Statistics surveys of consumer purchasing. Prices are increasing, but there is some variance to CPI for short time periods which affects CPI accuracy.
Users should exercise caution when using CPI estimates to make inferences about index changes for relatively short time periods, for individual goods and services, or for local areas.
For example, food price inflation has been occurring for some time before it began affecting core CPI.
Labor Costs
One example of how inflation skews metrics is unit labor cost—the ratio of hourly compensation to labor productivity. It increased largely due to declining labor productivity, but that may be skewed by inflation.
In inflation-adjusted terms, labor productivity decreased .2 percent in Q1: a potential sign of a lagging economy. But in unadjusted terms, it increased .6 percent—a sizable amount. The average quarterly change in real productivity is .2 percent. Essentially, productivity was substantial but not enough to offset the sharp change in inflation.
The other factor in labor costs is hourly compensation, but in both inflation-adjusted and unadjusted terms, it didn’t change much—a sign that growing labor costs were not what was driving down productivity.
Unadjusted hourly compensation increased .7 percent, which is in line with historical growth. Average quarterly growth in compensation in Bureau of Labor Statistics data since 2012 is about .8 percent. Real hourly compensation (adjusted for inflation) declined 5.5 percent in Q1.
Trade
The trade deficit increased in March, but for the full quarter (the first three months in 2022), it was the first time the deficit hadn't increased in a year. By value, the trade deficit effectively flat-lined in 2022 Q1.
And that too may be skewed by inflation. The trade deficit in terms of quantity, or card count, actually decreased. That is, more was exported than imported compared to the prior quarter.
Between February and March, there was a large increase in exports and the average cost of imports.
While traded quantity is a less accurate metric of trade—it depends on the value of the goods being imported—in general it tracks with trade value and March of 2022 is one of the few times the values substantially diverged.
GDP
While the rate of real GDP declined, unadjusted GDP rose at about the same rate it did the year before (in both annual rate and quarterly rate).
Industrial Production
Besides GDP and trade deficits, there are other metrics that show domestic production still growing, not declining in the inflationary period.
The index for real (adjusted for inflation) industrial production is up .1 percent from February—5 percent from what it was a year ago—and up 3 percent from what it was pre-pandemic.
