Summary
Despite recent economic indicators suggesting a slowing economy, we remain committed to our resilient-economy thesis. The Atlanta Fed’s GDPNow tracking model has revised its growth rate estimate for Q1 downwards, but other indicators suggest that imports and consumer spending will rebound in the coming months.
GDPNow Tracking Model Revisions
The GDPNow tracking model has been closely watched by investors and analysts alike as an indicator of the economy’s performance. On Friday, the model lowered its estimated growth rate for Q1 real GDP from 2.5% to -1.5%. This downward revision was attributed to a large increase in imports during January and a significant drop in consumer spending during the same month.
On Monday, the model further revised down its estimate of Q1’s real GDP growth rate to -2.8%. This downward revision was due to weak construction data in January and a decline in the new orders index in February’s M-PMI report. These revisions have led some analysts to question whether we may be seeing signs of a recession.
Import Growth Boosts Real GDP Estimate
However, an important point to note is that import growth was boosted on Friday from 5.4% to 29.7% year-over-year. This significant jump in imports is due in part to the impact of the "Trump 2.0 tariffs" on trade agreements between nations. Soaring imports have had a significant impact on the GDPNow real GDP estimate for this quarter, depressing it by a considerable margin.
Consumer Spending Rebound Expected
While January’s personal income report showed that total wages and salaries rose only 0.4% month-over-month, government social benefits increased by 1.8%, and nonlabor income (from dividends, interest, rents, and proprietorships) jumped 1.2%. Despite this increase in income levels, consumer spending actually decreased 0.2% month-over-month during January.
Many analysts attribute the weakness in consumption to adverse weather conditions. It was the coldest January since 1988, and December’s monthly rate for consumer spending was revised up from 0.7% to 0.8%. We are keeping a close eye on the personal income report and expect that consumer spending will rebound strongly in February and March.
Stagflation Scenario
It is worth noting that the stagflation scenario has been gaining credibility lately, which could impact the resilient-economy thesis. However, we remain cautiously optimistic about the resilience of our economy’s fundamentals and place a 20% subjective probability on this hypothetical development.
Atlanta Fed’s Regional Business Surveys
We will continue to pay close attention to the regional business surveys conducted by five of the 12 Federal Reserve district banks. These reports can be insightful in identifying signals and warnings that indicate broader economic trends. Additionally, we are watching the prices-paid index, which in February’s M-PMI hit its highest mark since June 2022.
Regional Surveys Indicate Stronger National M-PMI
Misleadingly, these regional surveys had indicated a stronger national M-PMI for February. Nonetheless, we believe that it is essential to closely monitor the regional business trends as an additional layer of data points to validate these national indices and help forecast growth in the real GDP.
Construction Report Adjustments
In response to Monday’s construction report for January, which indicated slow residential expansion, the GDPNow model made significant downward revisions to its estimate for domestic private real fixed investment (GDP: GPC), from an increase of 1.4% year-over-year in residential construction to a decline of -4.9%. The nonresidential structures component also dropped down from -2.0 to -2.5%. Conversely, January’s actual monthly changes for these categories are relatively weak.
Real GDP Calculation
Considering that real GDP is primarily a measure of domestic production and includes both exports and imports within this calculation, we find it fascinating how this quarter has seen the boost in import growth from -4.9% to 29.7%. While higher rates can often reflect better trade levels (exports + imports), these import numbers were not that strong.
It is essential for analysts to remember that real GDP focuses on domestic demand and production, rather than just supply chains alone. Therefore this huge increase in imports had a severe impact on the estimate as mentioned before.
Conclusion
While the recent economic indicators may be signaling that we are entering troubled waters with our resilient-economy thesis, we remain steadfastly optimistic about the prospects for Q1 growth lying somewhere between 1.5% and 2.5% real GDP increase during this period.
