GDP and Economic Indicators

Tariffs and Stock Market

  • Trump's tariffs are likely to be sweeping.
  • The administration plans to appeal the court's decision on tariffs.
  • The stock market initially increased due to potential hold on tariffs.

GDP Importance

  • GDP is a crucial economic indicator, particularly for bankers and lenders.
  • It reflects the ability of customers to repay loans.
  • It measures sales growth for a customer base.

Strategic Planning and Loan Growth

  • Strategic planning sessions involve discussions on loan growth projections.
  • Unrealistic loan growth expectations exceeding GDP growth can lead to poor underwriting and diminished returns.

GDP Composition and Definition

  • GDP is the sum of: CC (consumer spending), II (investment spending), GG (government spending), XX (exports), and MM (imports).
    • Consumer spending (C) constitutes almost 70% of the U.S. economy.
  • Official GDP definition: Total market value of all final goods and services produced within the United States in a year.
  • Must be produced within U.S. borders.

What is Not Included in GDP

  • Services not in the market (e.g., a spouse watching kids).
  • Charity work.
  • The underground economy (e.g., prostitution, drugs).

Quarterly GDP Numbers

  • First-quarter GDP is often weak compared to other quarters.
  • Revised data: March GDP growth was revised to -0.2%.
  • No data for January, February, and April; indicated by forward slashes (//).

Reasons for Weak First Quarter GDP

  • Weather: Winter storms, especially nor'easters on the East Coast, reduce spending.
  • Trump Tariffs: Businesses front-running tariffs by purchasing more imports before tariffs take effect.

Impact of Trade Deficit

  • US trade deficit is usually $60 to $75 billion monthly.
  • January deficit: -$130.6 billion.
  • February deficit: -$123.2 billion.
  • March deficit: -$140.5 billion.
  • Imports are subtracted from GDP, so higher imports negatively impact GDP.
  • Exports are positive for GDP.

Historical GDP Trends

  • First quarter GDP is typically the worst or second-worst quarter.
  • Imports increased significantly when Trump started discussing tariffs.

Private Domestic Final Purchases (PDFP)

  • Excludes exports, imports, inventory changes, and government spending.
  • Grew at 3% in the first quarter, which is considered good.

Real GDP

  • Adjusted to 2017 dollars.
  • U.S. GDP is $23.528 trillion.
  • Consumer spending grew at only 1.2% in the first quarter.
  • Durable goods (e.g., automobiles, appliances, furniture) saw almost a 4% drop.

Contribution to GDP

  • Consumer spending contributed 0.8% to the -0.2% GDP.
  • Exports minus imports contributed -4.9%.
  • Savings went up; Americans saved 4.3% of their take-home pay, up from 3.8%.

State GDP Variations

  • GDP numbers vary significantly by state.
  • Texas and Oklahoma GDP differs from Idaho's GDP.

GDP Now

  • Created by the Atlanta Federal Reserve.
  • Comes out 10 times a month.
  • Uses 13 key indicators correlated with GDP.
  • Formula predicts quarterly GDP estimate.

Accuracy of GDP Now

  • Early in the quarter, the error is larger (e.g., plus or minus 2.2%).
  • Accuracy increases as more data becomes available.
  • Example: October 29 forecast for Q3 2024 was 2.8%, actual was 3.1%.
  • End of January forecast for Q4 GDP was 2.3%, which was accurate.

The GDP Now Model Error in Q1

  • April 30 forecast was -2.7%, while the initial number was -0.3% (now -0.2%).
  • The original model had a flaw related to gold imports.
  • The new model corrects this error.

Gold and GDP Calculation

  • GDP does not include stock market purchases or gold investments.
  • The original GDP now model incorrectly counted gold.
  • Gold prices increased due to market uncertainty amid Trump's tariff announcements.

Impact and Correction

  • GDP now forecast for Q1 was +2% until February 28, then dropped to -3% after gold numbers were included.
  • The new model excludes gold, resulting in a revised forecast of -1.5% instead of -2.7%.

Accessing GDP Now

  • Available on the Atlanta Federal Reserve website.
  • Users can subscribe to email updates.

Recession Possibility

  • Economic expansions are often ended (murdered) by improper policy.
  • The possibility of a recession is being discussed.
  • Jerome Powell doesn't anticipate stagflation or a return to 2022 inflation levels.
  • Staff viewed the possibility of recession in the most recent May meeting is elevated due to the Trump tariffs.

Stagflation

  • Very low or zero GDP growth with inflation of 3% or more.
  • Rising credit card minimum balance payments are a sign of consumers being financially strained.

Economic Forecasts

  • Various forecasts are used to assess the economy's outlook.
  • GDP now forecasts.
  • New York Fed's now cast.
  • ISM (Institute for Supply Management) index.
  • Federal Market Committee's forecasts.
  • New York Fed's DSGE forecast.
  • Wall Street Journal survey of professional economists.
  • Northern Trust forecast.
  • PIIE (Peterson Institute for International Economics) forecast.

GDP Now Forecast

  • Recent forecast: 2.2% growth.
  • The GDP forecast will be available tomorrow via email.
  • The current, trusted forecast is 2%.

Dynamics and Influence Factors

  • The ISM manufacturing number and construction spending impacted the projected GDP.
  • Advanced manufacturing orders May 27 were weak, reducing GDP growth.

New York Fed's Now Cast

  • No email service.
  • Comes out every Friday.
  • Recent forecast: 2.43%.

ISM Manufacturing Index

  • Forecasting tool between 0 and 100.
  • Above 50%: Manufacturing is expanding.
  • Tip for loan officers.
  • Below 50%: Manufacturing is shrinking.
  • Above 42.3: No recession.
  • Latest number: 48.7.
  • Historically, 48.7 means about 1.8% growth next year.

Dynamic Stochastic Generational Model (DSGE)

  • Comes out every quarter.
  • Forecasts GDP growth for this year: 1.2%.
  • Forecasts GDP growth for next year: 1.5%.

Federal Market Committee Projections

  • GDP growth forecast: About 2%. Note the optimistic slant compared to the New York Fed.

Wall Street Journal Survey of Economists

  • Latest forecast for april.

Public Probability of a Recession

  • Probability of a recession is under 50%, it jumped in the first quarter of 2025.

Northern Trust Forecast

  • Weak forecast, with no negative numbers.

PIIE Forecast

  • One negative quarter in 2025.

Summary

  • A technical recession may be approaching, characterized by weak growth.

Bank Risk Index

  • Predicts bank failures.
  • Incorporates state unemployment rates.
  • Higher accuracy.

Bank Evaluation

  • Use the report to evaluate the overall health of your financial institution relative to possible recession, especially slow growth ones as predicted above.

The Hope Bond Implication

  • If right, rates will fall and bonds will rise.

Falling Rates and Bottom Implication

  • The Fed is winning the battle against inflation.
    Long-term inflation expectations are well-anchored.
  • Current yields are very high.
  • Likely to fall. If it falls, the price of your bond goes up.

Fed Balancing Act

  • Balance sheet and its impact is different.
    Increasing size of the balance sheet lowers rates more than decreasing the size of the balance sheet raises rates.
    Why are they asymmetrical?
    *Very important that QE be credibly followed by QT. Inflation didn't happen, but is happening now.

Argument

  • Trump tax bill is a negative.
  • Biden's trillions injected for Build Back Better is inflationary.

Long Term Impact

Is is is money spend on the economy or just bacteria?
* Increase taxes.
Reduce Spending.
* Imports.

Bond Convexity

  • Weird.
  • If you have a 10-basis point increase in the long yield and a 10-basis point decrease, you would expect the bond price to go up or down by the same amount, but they don't. They go up more than they go down. That's just how it is.

Bond Analysis

  • If rates drop by 3% the value of the bond increase is 72.6% more than move. If rates stay at 5% that’s okay. “If You lose, Win. If you win, you win.”