Indeed, increasingly the economic outlook for the U.S. is growing uncertain, with mixed signals coming from various indicators. GDP growth is slowing, business investment has been sluggish, and consumer sentiment has soured. The Federal Reserve Bank of Atlanta’s GDPNow forecast paints a grim picture, projecting an annualized 1.5% decline in GDP for the current quarter.
But let’s start with Friday’s stats. Consumer spending fell by 0.2% in January, with inflation-adjusted spending dropping 0.5%, marking the largest monthly decline since February 2021. This unexpected decrease in consumer expenditure was particularly pronounced in the goods sector, especially for big-ticket items like automobiles.
Economists have offered various explanations for this spending slump. Christopher Rupkey, chief economist at FwdBonds, suggested that consumers might be adopting a “wait-and-see” approach in response to policy changes in Washington, according to CNN.
Beth Ann Bovino, US Bank’s chief economist, noted that the decline followed strong spending in previous months, partly driven by holiday shopping and post-hurricane rebuilding efforts.
Despite the spending decrease, personal incomes rose by 0.9% in January, leading to a significant jump in personal savings from 3.5% to 4.6%. This shift in consumer behavior could indicate growing caution among Americans about their financial futures.
The core PCE price index, which excludes volatile food and energy prices, increased by 0.3% for the month and 2.6% year-over-year, showing a slowdown from December’s 2.9% annual rate. This brings inflation closer to the Federal Reserve’s 2% target, though the central bank has indicated it might take until 2027 for price hikes to stabilize at that level.
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It also appears that growth will slow considerably, according to the Federal Reserve Bank of Atlanta’s latest GDPNow forecast, which has significantly revised its forecast for the current quarter’s economic growth.
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The latest projection indicates a contraction in gross domestic product at an annualized rate of 1.5%, a substantial downgrade from the 2.3% growth anticipated just a few days earlier. It’s important to note that this estimate is preliminary and subject to updates as more monthly data becomes available.
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A major factor contributing to this pessimistic outlook is the impact of net exports on GDP. The model now predicts that trade will have a substantial negative effect, potentially reducing growth by 3.7 percentage points. This revision comes in the wake of recent government data revealing a dramatic widening of the merchandise trade deficit in January, which surged by over 25% to reach an unprecedented $153.3 billion. Before this new information, the GDPNow forecast had estimated a much smaller negative impact from trade, at just 0.41 percentage points.
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These projections highlight the significant influence that international trade can have on overall economic performance, which is in part why President Trump’s proposed tariffs on trading partners, including a 25% duty on Mexico and Canada and an additional 10% tariff on Chinese goods, are worrisome to so many economists. These potential trade barriers have also contributed to rising consumer inflation expectations, as evidenced by the University of Michigan’s February consumer survey.
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Meanwhile, Trump has been pushing for lower borrowing costs, with attention shifting from pressuring the Federal Reserve to cut interest rates to focusing on the 10-year Treasury yield. However, recent market movements suggest investors are more concerned about potential economic slowdown than inflation.
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The yield on the 10-year Treasury has fallen below 4.25%, driven by fears of a global trade war and softer economic data. “It looks like the economy is headed into recession,” Jay Hatfield, CEO of Infrastructure Capital Advisors, told Fortune, citing overly tight monetary policy.
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As the economy navigates these choppy waters, all eyes will be on the Federal Reserve’s next moves. While it’s expected to hold rates steady in March, a growing chorus of voices call for rate cuts to buffer against future uncertainty.
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