Atlanta Fed GDPNow Sees Economy Shrinking After Friday Data

The Atlanta Federal Reserve's GDPNow model has taken a dramatic turn, now projecting a contraction of 1.5% in the nation's gross domestic product (GDP) for the first quarter of 2025. This significant shift comes just over a month after President Trump took office and follows a strong fourth-quarter GDP estimate of 2.3% growth. The GDPNow measure, while not an official forecast, serves as a forward-looking indicator that has raised concerns among policymakers, economists, and markets alike.

The sharp decline in the GDPNow projection can be attributed to several key data points and indicators that have emerged in recent weeks. Trade data, consumer spending, inflation, consumer sentiment, and business confidence have all contributed to the model's revised outlook.

1. Trade data: The trade deficit rose to $153 billion from $122 billion, with virtually all of the jump coming from imports. This increase in imports, likely due to front-running of tariffs and inventory stockpiling, negatively impacted the GDPNow projection.
2. Consumer spending: Personal expenditures decreased $30.7 billion, or 0.2%, in the latest report. This slowdown in consumer spending, which accounts for a significant portion of GDP, contributed to the downward revision in the GDPNow projection.
3. Inflation: Inflation, as measured by the PCE price index, dipped to 2.5% annual growth after rising throughout the fall. Although this is a slight decrease, it still indicates elevated inflationary pressures, which could influence the Fed's monetary policy and market perceptions.
4. Consumer sentiment: Consumer sentiment fell off a cliff in January, dropping nearly 10% from the previous month. This decline in consumer confidence could lead to reduced spending and investment, further impacting the GDPNow projection.
5. Business confidence and investment: Businesses have been expressing frustration over a lack of economic policy certainty from the new Trump administration, which has announced and then canceled new tariffs on several occasions. This uncertainty could be rattling business investment, contributing to the downward revision in the GDPNow projection.

These factors, along with other macroeconomic policy uncertainties and rising inflation, have led to a significant shift in the Atlanta Fed's GDPNow projection. The market's perception of the U.S. economy may be influenced by these indicators, as they suggest a potential slowdown or even a contraction in economic growth.

As an investor, it is crucial to stay informed about these developments and their potential impact on various sectors. While the recent contraction in consumer sentiment and the rise in inflation expectations present challenges for sectors like Big Tech and insurance, these companies might be better equipped to handle these challenges due to their strong balance sheets and access to capital. However, a prolonged economic slowdown could still impact their growth prospects. Insurance companies, on the other hand, could face both lower investment returns and higher claims costs due to inflation.

In conclusion, the Atlanta Fed's GDPNow projection serves as a warning sign for the U.S. economy, with a contraction of 1.5% now on the table. Investors should closely monitor these trends and adjust their strategies accordingly, as the market's perception of the U.S. economy may be influenced by these indicators.