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Stagflation. It’s back.The definition of stagflation is growth below its long-term trend and inflation above trend.That’s what we got in the first quarter of 2022.The economy did not just grow slowly. It contracted on an annualized basis. Imports, which are subtractions from GDP, expanded massively and and exports fell. Consumer spending was weaker than expected, suggesting that households balked at high prices. Inventories fell, subtracting from GDP.U.S. trade policy has left our economy extremely vulnerable to trade imbalances. Because our leaders refuse to erect adequate trade safety-valves, any time the U.S. economy recovers faster than the economies of the rest of the world, U.S. income leaks out to foreign manufacturers. That means Americans earned less and produced less. In March and February, the trade in goods deficit rose to a record highs. The trade deficit wound up subtracting 3.2 percentage points from first quarter GDP.Inventories were weak after a massive build-up at the end of next year. As I’ve discussed a number of times, last year retailers were headfaked into thinking that year-end holiday sales were going to be strong because early holiday shopping had been better than expected. As it turned out, that early shopping was just people getting their shopping done earlier than usual because prices were rising and they feared shortages. So stores wound up with unwanted merchandise that had to be liquidated at the start of the year.
