News & Insights

Tariff Expectations Distorting Economic Data

We heavily discount the Atlanta Federal Reserve’s shocking projection of a GDP contraction of more than 2% for the first quarter, down sharply from its previous expectation of 2-3% growth and most other economic forecasts. The steep decline is due to shifts in net exports, consumer spending and residential investment, but idiosyncratic factors driving changes in the model inputs are likely exaggerating the negative effect on GDP. We remind readers that the Atlanta Fed forecast has, from time to time, produced numbers that were far from the mainstream and which never materialized.

We believe companies preemptively stockpiled imported goods ahead of proposed tariffs, exploding the January goods trade deficit to a record $153 billion. Import growth of 11.9% far exceeded the 2% growth in exports. A massive repatriation of gold is also skewing the trade balance in goods. In fact, an MRB analysis showed that removing the gold imports from the data alone would shift the model to forecast positive GDP growth.

The ISM Manufacturing survey, another key input for the Atlanta Fed GDP model, reported data that may be misleading as a result of companies preparing for proposed tariffs in January. New orders saw a large fall last month, but this is likely reflective of the comparatively large increase due to the pull forward in goods in January. The similar S&P Global Manufacturing survey showed the opposite, with strong manufacturing trends across the board, raising questions about the reliability of the ISM data.

The model’s forecast for a residential investment contraction probably has more fundamental merit, but its detraction from GDP will still be small. We believe that first quarter GDP will be much stronger than the Atlanta Fed forecast is implying.

Atlanta Fed GDPNow Forecast 

Source: Atlanta Federal Reserve, Bloomberg

S&P Global US Manufacturing PMI

Source: S&P Global   

Consumer Reports Distorted By USAID Spending Freezed? 

January spending data fell an unexpected 0.2% month-over-month, despite consumers remaining in good shape and experiencing strong income growth. Much of the spending drop came in the rather obscure category of “personal current transfer payments to the rest of the world,” which in addition to personal remittances includes overseas payments by nongovernmental organizations that were likely affected by the new administration’s almost immediate halt of foreign assistance funds.  

Excluding these overseas payments, consumer spending was flat for the month. Though this is still not a great result, the large gap between spending and income combined with January often having large seasonal changes that are unaccounted for in the BLS’s model mean the true numbers are probably more moderate than reported. Any sustained consumer pullback would be reflected in consumer spending expectations, which have declined only slightly. A recent New York Fed survey shows consumers expected a healthy 4% spending growth for the year ahead.

Monthly U.S. Personal Income vs. Monthly U.S. Personal Consumption 

Source: Bloomberg

Monthly U.S. Personal Income vs. Monthly U.S. Personal Consumption 

Source: Bloomberg

Fear Factor: Consumer Inflation Expectations Jump 

The University of Michigan’s closely watched Consumer Sentiment Index raised eyebrows with its finding that consumer inflation expectations have skyrocketed, with five-year inflation expectations jumping from 3% to 3.9% annually since the end of last year. The spike in one-year inflation expectations is even more pronounced, jumping from 2.8% in December to 4.9%. With a given number of unknowns regarding trade, it is easy to traffic in worst-case scenarios, including inflation hysteria.

The survey’s results are skewed by a big jump in the number of “doomsday” respondents who believe inflation will rise by more than 10%, an implausible scenario. In contrast, other respected surveys, such as the New York Fed Survey of Consumer Expectations and the Atlanta Fed’s business survey, show little or no rise in inflation expectations. 

The most recent CPI and PPI inflation data shows that inflation remains well below the peak, though it does remain above the Fed’s 2% target. Where inflation settles is likely to be a lower level than the sentiment surveys reflect, but there are indications that some sectors of the economy may be seeing an uptick again. The US ISM Manufacturing Prices are at their highest level in two years while S&P Global US PMI input prices have moved up significantly amid concerns over the possible effect of tariffs. A recent New York Fed regional survey of both manufacturing and services companies reflects a similar rise. It remains to be seen how much of that increase will be passed through, but given the consumer spending health, businesses are likely to pass on a significant portion

University of Michigan Consumer Inflation Expectations 

Source: University of Michigan, Bloomberg

New York Fed Survey of Consumer Inflation Expectations  

Source: Federal Reserve Bank of New York, Bloomberg

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