GDPNow is roaring while OECD cuts forecasts. Which is right? Spoiler: it’s complicated.
KEY TAKEAWAYS
MY HOT TAKES
Future’s so bright… I gotta wear shades. Those were my parting words to Maria Bartaromo and her expert panel this morning after I stepped off the set. I heard the chuckles in the background as I headed to the greenroom to collect my bag and head to my office TO WRITE THIS NOTE. I wasn’t seeking a laugh, but rather to leave a memorable message.
Of the many topics we covered this morning was the discrepancy between the OECD’s latest projection for US growth and the Atlanta Fed’s GDPNow forecast. They seem to be going in opposite directions.
Earlier this week the OECD lowered its ‘25 GDP forecast to 1.6% from 2.8%. The organization pointed to the raising of the effective tariff rate and expected rise in inflation for the downgrade. On the completely other side of the spectrum, we have the Atlanta Fed’s GDPNow model’s latest prediction at 4.6% for the current quarter.
The GDPNow model is a rules-based statistical algorithm that mimics the Bureau of Economic Analysis’. It is a real-time estimate of how fast the U.S. economy is growing this quarter, and it uses actual economic data—like retail sales and factory output—to guess the current GDP before the official number comes out. Now that you know how it works, what do you think of the 4.64% estimate? Have a look at the following chart of GDPNow and keep reading.
You can see by the chart that it moves around a lot, which is encouraging, because that means it is constantly seeking the most up-to-date trajectory of GDP. Sometimes though, a noisy line like this makes it hard to see a pattern, but in this case, the pattern should be clear, and you will surely be focused on the right-hand side of the chart and how the estimate changed so much in these past 4 months or so. You will note a pronounced decline leading into the end of Q1, which was spot on, leading to the surprisingly low actual BEA-released GDP number.
That was not so peculiar given the rapid declines witnessed in the economic numbers leading up to the quarter’s end. So then, what could possibly be the cause of the stark increase at the beginning of April and its further spike earlier this week?
Now, I am sure that I don’t have to remind you about the tariffs and nasty trade haggling going on. Despite that, I urge you to put that aside for a minute–for analytical purposes. Think about what makes up GDP. Consumer spending, Government Spending, Investment, and net trade.
The GDPNow number tracks Retail Sales, Auto Sales, CPI and PCE Price Indexes, Employment Cost Indexes, and housing related costs to come up with consumer spending estimates. And, in case you haven’t noticed, these numbers have not been bad. That brings me to one of the points I made on Fox this morning. We have grown to expect some bad numbers–because we know that tariffs have real costs. However, we have not seen those bad numbers just yet. The feedback mechanism is certainly delayed, but in reality, even the ones that should be showing up now have not… showed up yet. Can we get inflation? Yes, but it hasn’t really shown up yet.
Amongst the other GDP categories, net exports are one to note. Remember the mad rush for companies pulling forward imported purchases to beat the looming tariffs? Well, that surge had everything to do with our last negative GDP print. Remember imports take money or growth out of the market. Getting practical for a second, a company can only sell so much stuff, and they knowingly bought extra stuff last quarter. Therefore, this quarter, we would expect companies to import less, regardless of tariffs. Think about it… keep thinking. Did the lightbulb go off yet? Less imports this quarter will BENEFIT GDP. Now, all that can be foiled if counter-tariffs affect foreign demand for US Exports and they decline as well; we have to watch that one.
I gave you just a few examples of what could cause GDP forecasts to increase. One of those represents a resilient consumer, and the other, perhaps a technicality in timing. Now, I have skipped over the many other factors in this model, but they all have similar stories. Inflation is tame and everything seems solid… for now. Of course, things can change. I will go so far as to say, with high certainty, that they WILL change.
I can’t tell you by how much or when, but I can tell you that they will all fluctuate back and forth as the administration negotiates its way through the long list of countries who have lined up to strike deals. A reconciliation tax package–some form of one, at least–is likely to hit in late summer, and the Fed is poised to cut rates later on in the year. These will both be stimulative, though the positive effects may not show up right away.
On inflation, that is likely to change somewhat in coming months. Even if the administration is successful in all its negotiations, it seems like all roads are converging on an effective tariff rate of around 10%. It was something like 2.2% in 2024. So, imported stuff is going to cost importers around 7.8% more at the end of the day–it’s just math, silly. Let’s pretend that companies will eat half of the increase, and that companies only import half the stuff they sell. This vastly over-simplified model will assume that consumer goods can cost as much as 1.9% more than it did last year under a lower tariff regime. Inflation, as it is technically calculated, will increase by that much for exactly one year, then trend back quickly to the long run rate because of the base effects (it’s also just math, silly). Inflation can run away if there are supply chain problems or consumers go wild–the exact scenario we had in 2021–but let’s not go there yet, because we have no evidence of it.
Ok. Now that was a circuitous route that I just took to let you know that the economy is somewhat of a living organism. It does not sit still. It adjusts; it reacts… it changes over time. As investors, we have to learn to avoid getting caught up in the weeds. Unfortunately, we are all hoping for a short-term solution to a long-term challenge. Whipping global trade into shape is complex and it takes time. Might I remind you, as investors, we signed up to run a marathon and we have only run about ⅓ the way. Now is not the time to be thinking about the finish line.
Now I am off to give a keynote address at the Microcap Rodeo Conference at New York’s famous Sparks Steakhouse. My final message: alpha requires discomfort. I know you have some discomfort, but if you go back to the slide above-the one with all the ups and downs–and you take three large steps back and draw an imaginary trend-line from left to right, you will come up with a positive sloping line. It points to the future, and it’s gonna be bright, so bring your shades… and be patient, it took 631 days to resolve the US-China trade dispute in 2018/2019.
YESTERDAY’S MARKETS
Stocks gained yesterday after JOLTS Job openings jolted naysayers by coming in stronger than expected. More jobs are a good thing. 😉 The excitement that ensued led the Nasdaq Composite back into positive territory for the year. Meanwhile, bond traders watched the tax reconciliation bill make its rounds on Capitol Hill, and they chose to sit this one out with 10-year yields adding just 1 basis point in the session.
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