The first quarter 2022 GDP declined by 1.4%.  The most surprising thing for me was how little attention it received.

Sure, it was covered, but it didn’t seem like it was headline news for long.  Even on CNBC, it wasn’t scrolling on the screen for long.

Maybe some of the news networks downplayed it to protect the regime.  I can’t necessarily accuse CNBC of doing this because they certainly have had plenty of discussions on the high price inflation numbers.

CNBC does tend to be a bullish network.  Ironically, they probably get more viewers when markets are crashing.  But on Thursday, there just didn’t seem to be a lot of discussion about the decline in GDP.

The 1.4% decline was well below analyst expectations of a 1% gain.  But the establishment narrative (when not ignoring the news completely) seems to be that the economy is not falling into recession.  There were various factors that contributed to the decline, but we are assured that consumer spending is strong.

Of course, consumer spending isn’t what gives us a good economy.  It can be a reflection of a good economy or an unsustainable boom.  It is a common mistake in economics to confuse correlation with causation.  Consumer spending isn’t what makes us prosperous.  The productivity that allows us to spend is what makes us prosperous.

Stocks actually boomed after the news after taking a beating in previous days.  Many stock investors see the low GDP as bullish in the short run because it means that the Fed may tighten less this year than expected.

Anyway, we are being assured that this drop in GDP is just a blip.  Maybe you could say that it is “transitory”.  For some reason, they haven’t used that word to describe it.

The GDP metric has its flaws, but it is still useful.  A supposed pullback in defense spending contributed to the decline in GDP even though a decline in “defense” spending is actually a good thing.

Still, the high price inflation numbers are the elephant in the room.  The GDP is measured in real terms.  If the inflation numbers are at all understated, then the GDP numbers are even worse than what’s being reported.

When you have 8.5% annual price inflation, it makes it hard for the economy to grow in real terms.  It’s kind of like wages.  How many people are getting annual salary increases above 8.5% per year (or more if you count taxes)?

The 1970s – Or Worse?

This could be a return to something like the 1970s.  We are already nearing double-digit price inflation.  Interest rates are nowhere near that, but that is actually a problem for the long term.  It means that real interest rates are deeply negative.

If the economy continues to weaken, then we might have the Fed’s nightmare scenario of recession and high inflation.

From an investment standpoint, the period from the late 1960s up to the early 1980s was one of the worst times ever for stock investors.  Since the end of World War 2 and the Great Depression, this period in the 1970s was the worst for U.S. investors.

There were short periods in the 1970s where stocks boomed.  But overall, it wasn’t a good time period.  The problem is that when price inflation is in the double digits, you need even higher nominal returns just to get any sort of a real gain.

Think about this.  Right now, you would need annual gains of at least 8.5% in stocks just to break even.  If your money were invested in a taxable account, it would be even more.  And this means taking on a great deal of risk.

So for all of those index fund investors who think they will retire early and pull 8 to 10 percent in returns over the long run, they may be in for a great shock.

There is also a good possibility that the economic times ahead will be even worse than the 1970s.  As stated previously, real interest rates are deeply negative right now.  The debt load is far higher, and government is involved in nearly every facet of our lives.

I have to give the disclaimer that not everything will be worse.  We will still have our smartphones and our big screen televisions that mostly didn’t exist in the 1970s.  But in terms of wages, investments, and prices for basic necessities, we could be facing an even tougher time than the 1970s.

The bad GDP numbers coupled with high price inflation numbers put the Fed in an uncomfortable spot.  Unfortunately, it does the same for most Americans.