A reader asked the above question. It’s a good one, answer below.
Understanding Gross Domestic Product (GDP)
The D stands for domestic and P stands for product. Exports count because they are domestic product.
Imports are irrelevant.
Wait a second you say. The BEA’s formula is: GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports (X) – Imports (M))
However, the BEA only subtracts what should not have been counted in the first place. For example, when you buy a tool at Home Depot, no one knows what percentage is from China, Mexico, or the US.
Assume 75% made in China and 25% US. But 100% of that purchase was added to Consumption (C). To make up for what is counted in consumption but shouldn’t be, the BEA subtracts imports.
The BEA should make this clear but doesn’t. I will. Imports do not impact GDP because they are not domestic product.
What About Inventory?
Change in private inventories (CIPI), or inventory investment, is a measure of the
value of the change in the physical volume of the inventories—additions less
withdrawals—that businesses maintain to support their production and distribution
activities.
The steel mills are presumably cranking out steel like mad and sitting on it. But small parts manufacturers are also ordering a the steel and aluminum (or whatever) and hoarding that.
So we have had a lot of production happening at the intermediate levels that may be more artificial than not resulting in inventory volatility.
If the value of that inventory plunges then CIPI plunges. CIPI can also drop if it sold and not replaced.
Now think about GM and Ford. They are scrambling to build cars that nobody wants. However, cars are counted as sold when they are shipped to dealers, not when a consumer buys them.
If car prices crash along with everything else, then CIPI related to cars would crash.
Guessing Game
We are in a big guessing game as to the valuation of inventory stockpiles and whether or not any depletion is re-ordered.
We are dealing with Trump here.
Trump Tariff Pause Ignites Another Mad Dash for Imports
On April 10, I commented Trump Tariff Pause Ignites Another Mad Dash for Imports
Companies cancelled import orders from high-tariffed countries. Now they want those orders.
For how long? Is Trump’s 90-day pause 3 days or 210?
My base case is recession. But did it start in March or will it be postponed until June? Later? Earlier?
GDPNow Spot Check
A quick check on GDPNow shows the current contribution estimate for CIPI is 0.32 percentage points, down from 0.68 percentage points on March 20.
GDPNow made adjustments to its model to handle the surge in gold imports. The BEA handles physical gold as a financial asset but jewelry as a consumer product.
- Nowcast: -0.3 Percent
- Real Final Sales: -0.7 Percent
- Final Sales to Domestic Purchasers: +2.0 percent
That is one hell of a difference between RFS and RFS domestic.
The difference between the Nowcast and Real Final Sales is CIPI. They are off a bit, I presume due to rounding.
CIPI nets to zero over time so the number to watch is Real Final Sales.
And if the number to watch is Real Final Sales, then it doesn’t matter much, in theory, what the heck inventories do.
However, there is a potential for some really big inventory writedowns if hoarders get stuck with too much product and delay production in the future because of it.
Related Posts
April 10, 2025: Three Things that Spooked the Bond Market and Why Trump Blinked
Trump calmed the stock and bond markets for now. The key issues still remain.
April 10, 2025: CPI Much Better than Expected, Bond Market Reacts Poorly in Big Warning
The CPI posted some stellar numbers, but the bond market yawns.
Is there any beef to this
https://deanblundell.substack.com/p/carneys-checkmate-how-canadas-quiet
Highly doubtful
Seen similar stories about Japan and China
Surprised that more didn’t take the time for supply chain risk management contingencies, since Covid Theater 5 years ago was a great case study.
“We are dealing with Trump here.”
Big picture, we are dealing with: that which can’t continue, won’t. Empires rise and fall. Good times end in bad times. Now stories are appearing about the end of globalism. Every cycle has an inflective turning point in the opposite direction. The then current status quo becomes unacceptable. Trump is the very visible expression of that. It was Nixon who closed the gold window. If not Nixon, it would have been someone else, as what caused Nixon to close the window, was already in the process of reaching an inflection point.
Government spending is a component of the U.S. GDP calculation.
In 2023 the annual federal deficit was 6.3% of GDP.
Surely the goal of DOGE won’t be to cut too much as that will guarantee the simplistic negative quarters of GDP growth = recession. \s
“Government Spending (G)”
….money it stole from it’s citizens
….money it creates out of thin air
GDP is fiction
“By adding up final goods and services, government statisticians promote the fiction of an economy via the GDP statistic.”
“Since it is not possible to quantitatively establish the total of real goods and services, data like real GDP should not be taken seriously.”
mises . org/mises-wire/does-gdp-present-accurate-picture-economy-not-likely
I’m hoarding japanese Sake, and European Chocolates. One needs to have priorities in life..
US egg prices increase to record high, dashing hopes of cheap eggs by Easter https://ca.finance.yahoo.com/news/egg-prices-continue-increase-despite-124244254.html
There will undoubtedly be specials (loss leaders) next week. Wholesale prices have dropped, lagging retail prices will be coming down. Digital world exaggerates the amplitude of moves and compress the duration as the bets are no longer phoned in.
https://tradingeconomics.com/commodity/eggs-us
its just wholesalers trying to wring the last bits of excessive profit from the existing inventory. Egg prices will drop like a rock after Easter.
I finally saw the price of eggs drop from $7.50 to $4.70 yesterday around Dallas Texas.
Off topic…Im surprised Mish or no one following this blog has noticed the amount of money being repatriated out of this country. USD has been down big on stock market sell off days and hardly down or even up on big stock market up days. At this very moment, the USD is down 1.45% and SP500 down 0.27%. That should be consistent with a good sized stock rally. This phenomena has certainly been a trend since Trump opened his mouth on tariffs.
Trump’s erratic moves related to international trade have certainly not inspired confidence in foreign investors. Why would you expect a stock rally if the US$ is down?
Why should i expect a stock rally if the Nasdaq was recently 65% above its underlying trend line from 2009? Maybe the deviation can grow even wider, but that is big deviation from the mean. It will be corrected, whether or not it happens now.
Is the federal reserve going to bail out some poor insanely over leveraged hedge funds over the weekend?
“If it saves even one life…after all, we’re all in this together!”
The old, take em down into the close so that the Fed has an excuse and those in the know get long between 4 and 4:14pm
a sinking tide fills all pockets.. jfk – or something like that…
Watch what Bill Ackman does.
The uncertainty of this tariff experiment is already impacting the economy. Some of those impacts will be positive in the short term. And some will be negative.
I am patiently waiting for the full impacts to take hold over the rest of this year.
What a great experiment!
We are going to learn a lot.
I would not expect a recession to begin till later this year.
What a show!
CPI was not stellar. Food. Shelter. Services. All still running hot. In fact, food was up YOY by the most since last July I believe.
What brought the overall number down was gas, autos, and health services.
The stuff you absolutely need, like food and shelter, still running well above 3%.
I noticed as much. Most people just look at the top-line number.
The surprise to me was shelter at 0.2 with Rent and OER higher
PPI ice cold. Another wonderful report.
Yes – Combined with bonds you have stagflation
Quite wonderful
Don’t understand, Mish.
If monthly PPI and CPI are both level or down (not that that will continue in the future necessarily), how is that stagflation (which needs ‘inflation’)?
Bonds are signaling inflation.
Steel is signaling inflation
Tariffs in general will cause inflation
Budget deficits signaling $ weakness and inflation
Falling oil signaling recession
Gold signaling lack of faith in the Fed and Congress
This is not the same stagflation as the 70s and 80s.
Bonds are signaling tariff retaliation. The CPI was negative. Looks like 1970’s stagflation, a miserable ride it was. The good news- We can all buy junk American cars to support the auto workers.
Wrong word Mish. Everything is beautiful lol