The GDP report for the first quarter of the year showed a very engaged business sector as it rushed to try to minimize, as much as possible, the future impact of higher tariffs. Net exports of goods and services, which is defined as exports of goods and services minus imports of goods and services, contributed a negative
4.8 percentage points to the economy’s growth rate during the first quarter of the year. That is, exports of goods and services contributed 0.19 percentage points, but imports of goods and services contributed by subtracting a whopping -5.03 percentage points from growth during the quarter. The good, and bad, news is that much of this increase in import growth was “hoarded” by firms during the first quarter and thus contributed positively to economic growth during the quarter and is sitting as business inventories, which is part of real investment (we know it sounds complicated, but it gets even more complicated!).
Firms increased inventories in such a way that the accumulation of inventories “added” 2.25 percentage points to economic growth during the quarter, that is, slightly less than half of the 4.8 percentage point negative contribution from net exports of goods and services. In some way, the drawdown produced by the surge in net exports of goods and services was stored for the future. And this is the bad part of part of firms hoarding goods as inventories: inventory accumulation entered as “real investment” in GDP accounting during the first quarter, but it will start coming out in the following quarters. If firms have very large inventories, as they deplete these inventories during the next several quarters, this depletion in inventories will subtract from economic growth, through a reduction in real investment. Thus, what was positive for today will be negative for the future.
If Inventories Are So High, Why Are We Hearing That Americans May Face Empty Shelves?
Here is where things get even more complicated. Uncertainty has the potential to disrupt decision making by firms and affect the economy in a negative way. What happened with imports during the first quarter of the year was a clear indication of this uncertainty at work. Some are comparing what happened during the COVID pandemic to what is about to happen today. We disagree with the comparison but not with the potential effects.
During the COVID pandemic there were various goods that were scarce, like toilet paper, cleaning products, even ice cream was flying off the shelves with no reassurance of when it was going to be restocked, just to give some examples. At the same time, for many of these products, if they were available, customers had limits on the number of items they could buy. These issues were real and were triggered by supply chain disruptions across the global economy and by the fact that people rushed to hoard these goods because they didn’t know when they would be able to buy them again in the future. The limitations in “only one or two per person” had also to do with the fact that sometimes people buy extra if they know it will become scarce in order to benefit later by selling the stock at a higher price. During the pandemic, there were numerous cases of people hoarding some supplies and then asking for higher prices. Sometimes politicians pass ordinances or laws against price gouging during crisis.
But this is not the case today. Any firm can buy whatever good from whatever supplier available in the domestic or international markets. There are no supply chain issues right now, or at least not one triggered by a collapse in production across the global economy, as happened during the pandemic.
The problem today is: at what price? One of the determinants of companies’ pricing policies has to do with restocking costs. The uncertainty over what would be the price firms would have to pay for acquiring (i.e., restocking) a good in the future could push firms to pull goods from shelves until they have more certainty of how much it will cost to restock those inventories, even if they have plenty of supplies available of those goods today. We are not saying that this is going to happen, but it could happen if the uncertainty over tariffs remains.
At the same time, we have already seen some indications that foreign shipments have plunged, as some of these tariffs, especially against Chinese imports, are punitive—that is, nobody will buy goods from China at those tariff levels. If China is the only supplier of a specific good, then that good is going to be scarce. If consumers start to think that some goods are going to be scarce and they start hoarding these goods, it could also contribute to empty shelves during the next several quarters.
While we don’t like tariffs as a policy instrument, what is negatively affecting the economy is not the tariffs themselves but the uncertainty of not knowing what the tariffs are going to be and not being able to make informed decisions.
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Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.
Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. A value above 100 signals a boost in the consumers’ confidence towards the future economic situation, as a consequence of which they are less prone to save, and more inclined to consume. The opposite applies to values under 100.
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GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.
Employment cost Index: The Employment Cost Index (ECI) measures the change in the hourly labor cost to employers over time. The ECI uses a fixed “basket” of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.
US Dollar Index: The US Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the
U.S. dollar gains "strength" when compared to other currencies.
Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).
ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.
Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.
Producer Price Index: A producer price index(PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Industrial production: Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interest rates and consumer demand.
The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.
Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.
Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.
New Export Index: The PMI New export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.
Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.
The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.
Source: FactSet, data as of 12/6/2024
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