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Get Ready for Weaker Growth and Higher Inflation. The Consensus Was Wrong.

May 7, 2024

The weak GDP figure for the first quarter came with a double negative: poor consumer spending and exports, plus a rise in core inflation. The US administration’s enormous fiscal stimulus underscores the importance of considering the weaker-than-expected data.

A deceleration in consumer spending, a decline in the personal savings ratio to 3.6%, and poor exports added to a set of figures for investment that were also negative when we looked at the details.

The gross domestic product is much weaker than the headlines suggest. If we look at consumption, both durable and non-durable goods were flat or down, while the only item that increased modestly was the services factor. Residential and intellectual property boosted investment, while equipment remained weak in the past two quarters. The slump in export growth coincided with a significant increase in imports, which weakened the trade deficit. Government spending continues to rise, albeit at a slower pace, and becomes the main factor to disguise what is evidently a concerning level of growth for a leading economy with enormous potential.

It is precisely because of the unnecessary increase in government spending, designed to bloat GDP and provide a false sense of economic strength that inflation remains elevated and rises over a three—and six-month period.

Rising public debt has bloated the economy and left it at a disappointing level compared to its potential, as evidenced by higher inflation and weaker growth.

When the Fed’s preferred inflation measure rises to 2.8% in March from a year ago and the core PCE deflator rises to 3.1%, there is no strong economy. The propaganda repeatedly claims that the fight against inflation is over, but inflation has accelerated on a quarterly and half-year basis.

It is important to understand why these figures are negative. The average American household is poorer. Rising inflation and declining savings, inexistent real wage growth, employment-to-population, and the labor force participation rates remain below 2019 levels, and bloating GDP with an unacceptable deficit means higher taxes, lower growth, and weaker real wages in the future.

We must remember that Biden’s economic plan started with a full-blown recovery in place. This administration did not suffer the consequences of the COVID-19 lockdowns. By the time the Biden administration arrived, America was already creating almost 250,000 jobs a month.

Biden should have picked the fruits of a fast-recovering economy that is almost energy-independent and, therefore, should not have suffered the impact of the war on Ukraine while enjoying the tailwinds of the largest fiscal and monetary stimulus.

The multiplier effect of the chain of implemented government programs may have inflated GDP, but gross domestic income (GDI) presented a significantly different picture. The GDI revealed a stagnant economy with persistent inflation.

The government’s wasteful spending of newly printed money is adding gasoline to inflationary pressures, a result of careless fiscal policy and massive deficit spending. When the government prints more money than the private sector needs, inflation occurs, and the purchasing power of that money decreases.

The evidence from the past four years indicates that if the government had abandoned its spending and tax hike plans, the United States economy would have recovered better and with higher productivity growth. Despite the recovery, tax revenues fell short of expectations and spending rose to create what is now a completely unacceptable deficit.

Many economists argue that the economy is growing, and that inflation is a secondary problem. Not for the average American. Citizens are poorer in absolute and relative terms.

The consensus was wrong about the expected multiplier effect of government spending on growth and also about inflation because market participants decided to ignore monetary aggregates and the reality of unproductive spending.

Can the United States government boast this level of growth? One could argue that delivering $1.6 trillion of GDP with a $2 trillion increase in debt is not a success. This isn’t growing; it’s getting fatter. This negative situation has not improved since 2024. Every 100 days, the U.S. national debt rises by $1 trillion. Therefore, this means more taxes, less growth, and weaker real wages in the future. We can conclude that the United States’ public finances would be stronger and the economy would be more productive if the gigantic public spending packages and tax hikes had not been implemented.

The United States administration needs to focus more on the productive sector and less on increasing the size of the bureaucratic machine. Even if the rise in mandatory spending is offset by cuts in discretionary spending, it will still be difficult to reduce debt. Therefore, prioritizing is key. Taxes are already high enough, and there is plenty of evidence that shows how the recent increase in the tax wedge for businesses and families has made the economy weaker.

The government needs to understand that it is the cause of inflation. Only the government can make all prices rise in unison and continue to increase, and it achieves this by diluting the purchasing power of the currency and issuing more than demanded.

The next two quarters are going to be key to understanding the extent of the damage caused by reckless fiscal spending.

The US government has sabotaged the Federal Reserve’s modestly hawkish policy. The public deficit has added up to $2 trillion of newly created money per year, only to deliver less economic growth and cancel out the now insignificant $1.6 trillion decline in the Fed’s balance sheet. Whether there are rate hikes or not, the Fed cannot achieve price stability if the Treasury ignores all warning signs and adds more debt.

Since 2018, the United States has added roughly $7 trillion of GDP, while the government has increased debt by $12 trillion. Implementing fiscal stimulus by increasing expenditures and raising taxes is clearly ineffective.

Markets ignore the Fed’s hawkish messages because they see insane public debt and unsustainable deficit spending, and participants know that monetary destruction will resume regardless of persistent inflation.

There is plenty of time to correct the inflation and low growth problems. Only one measure will help: cutting spending. Everything else has failed.

Courtesy of


Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

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