Real GDP, supply & demand…

**How full is the U.S. recovery? Inflation’s impact obscures the answer.**

**The nation’s G.D.P. has outpaced the growth rate that preceded the pandemic, until you take higher prices into account.**
**By Ben Casselman, The New York Times, Jan. 27, 2022**

**Here’s a notable fact about the U.S. economic recovery: Inflation-adjusted output last quarter was just 1 percent below where it would have been if the pandemic had never happened.**

**Here’s another one: Ignoring inflation, output is 1.7 percent above where it would have been absent the coronavirus....**

**The reopening of the economy after the initial lockdowns brought a surge in demand, which was bolstered by the trillions of dollars in aid that the federal government provided to households and businesses. But supply chain bottlenecks, labor shortages and other issues meant that businesses could not fully meet that demand. Strong demand plus limited supply is a recipe for inflation....** [end quote]

The charts tell the story. Nominal GDP is soaring. But inflation-adjusted real GDP is muted by rising inflation.…

**U.S. Economy Grows as Fourth-Quarter GDP Shows Strongest Year in Decades**
**Economists expect growth to slow this year on weaker consumer spending, persistent supply shortages**
**by Josh Mitchell, The Wall Street Journal, 1/27/2022**

**The U.S. economy grew rapidly in the fourth quarter of last year, advancing to a 6.9% annual rate [nominal, not inflation-adjusted]. Gross domestic product, the broadest measure of goods and services, in the fourth quarter was triple the third quarter’s growth of 2.3%, adjusted for inflation...**

**Thursday’s report contained warning signs. Most of the growth owed to companies’ restocking rather than people and firms buying stuff. ... Excluding the inventory effects, output grew at a modest annual rate of 1.9% in the fourth quarter. ... The forecasting firm IHS Markit projects that output will grow at a 2% annual rate in January through March. ...** [end quote]

Supply is still constrained by Covid-19 effects on the workforce and by supply chain bottlenecks. Demand will be lower in 2022 than 2021 because the emergency fiscal stimulus – government helicopter money to consumers – has ended. The Federal Reserve will taper its emergency monetary stimulus by tapering long-term bond purchases and raising the short-term fed funds rate.

These are all headwinds to the economy and the asset markets.

Today’s news is cheerful but the fine print shows coming weakness.