“Trumpcession.”
If you haven’t heard the term before, you will now, as a closely watched real-time U.S. economic weathervane is signalling that GDP is shrinking at the fastest pace since the pandemic lockdown.
The Atlanta Fed’s GDPNow model estimate for annualized growth in the current quarter was a stunning -2.8 per cent on Monday, down from +2.3 per cent last week. A month ago, the model showed that growth in the January-March period was tracking close to +4 per cent.
These estimates are published regularly as new economic data are released, and can be quite volatile. There were 11 in February alone. Friday’s shock reading of -1.5 per cent was led by a record-high US$153-billion trade deficit in January, most likely as firms front-loaded imports ahead of tariffs, and Monday’s decline was driven by soft manufacturing activity.
There’s every chance -2.8 per cent turns into a positive reading in a few weeks.
True, the Atlanta Fed number is an outlier for now. The New York Fed’s equivalent Nowcast real-time tracking model was updated on Friday to +2.9-per-cent annualized growth in Q1 from +3 per cent. And the Dallas Fed’s “weekly economic index,” which doesn’t include the most recent data, was showing +2.4 per cent on Thursday.
But the Atlanta Fed’s GDPNow real-time estimates are historically the most reliable of these models, and the negative figures didn’t come out of nowhere. A lot of soft economic indicators, like sentiment surveys, have been extremely weak in recent weeks, and some hard economic activity indicators are flashing red, too.
Consumer sentiment in January slumped the most in 3½ years, retail sales dropped by the most in nearly two years, real spending fell at the fastest rate since early 2021, and retail giant Walmart has warned of a tough year ahead. It’s perhaps no surprise that Citi’s U.S. Economic Surprise Index has slid into negative territory, hitting the lowest point since September.
A common thread running through all of this is the huge level of uncertainty being created by U.S. President Donald Trump’s agenda: trade protectionism, particularly tariffs; his apparent growing closeness with Russia and distance from traditional allies like Europe; and the DOGE (Department of Government Efficiency) scythe being taken to federal spending and employment.
Markets are certainly signalling there could be trouble ahead. The Nasdaq has lost as much as 9 per cent in 10 days, with Big Tech down even more. Investors are seeking the safety of U.S. Treasuries: The two-year yield on Friday fell below 4 per cent for the first time since October, and the 10-year yield has tumbled 60 basis points since mid-January.
These moves could matter to the real economy because of the “wealth effect.” As Moody’s Mark Zandi noted recently, the top 10 per cent of American households now account for around half of all consumer spending. That’s a record. They also own a lot of stocks, and if Wall Street is heading south, they are more likely to tighten their belts.
Economist Phil Suttle said he expected Mr. Trump’s agenda to weigh on the economy this year, but didn’t expect it to have such an apparently negative impact so quickly. But if the “blunt and chaotic” implementation of Mr. Trump’s spending and trade policies hit growth harder than imagined, the Federal Reserve may cut rates in the second quarter, Mr. Suttle reckons.
The Fed’s rate-cutting cycle is on hold for now, largely because of the uncertainty surrounding Mr. Trump’s trade and fiscal policies. But an impending “Trumpcession” probably wasn’t on policy makers’ minds when they pressed the pause button. It likely is now.
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