Breaking Up Is Hard to Do
Beauty lies in the eyes of the beholder …
Donald Trump and Elon Musk have broken up over Musk’s insistence that plus-sized US government spending cannot be deemed beautiful. Musk may be right, especially since the cutting of fed funds from September 2024’s 5.38% to the current 4.38% was joined by an antithetical climb by the 10-year Treasury yield from 3.7% to a recent 4.4%. I’m hard put to find any earlier examples where a full percentage reduction in fed funds was accompanied by a 7/10th of a percentage point increase by the 10-year Treasury yield.
From September 2024 to April 2025, the annual rate of core PCE price index inflation barely dipped from 2.7% to 2.5%. And now the expectation is that core inflation will get at least a temporary lift from forthcoming tariff-driven price hikes that will not be fully realized until later this summer.
The reality is that the US economic growth would be slower and corporate earnings would be lower were it not for the fiscal stimulus implicit to a nearly $2 trillion federal budget deficit. Trump and the Republicans realize that by moving too rapidly on budget deficit reduction both the economy and corporate earnings would suffer early on, especially given the likely near-term loss of economic growth to the imposition of tariffs.
US would benefit if the tax system were redesigned to promote economic growth ...
Taxation schemes can promote economic growth by relying less on the taxation of income and more on the taxation of consumption. If done correctly, the taxation of consumption can have the added benefit of reining in government spending on healthcare and highways. The more the government taxes products and activities harmful to health, the lower will be government outlays on Medicare, Medicaid, and other government funded health programs.
Moreover, higher gasoline taxes would not only reduce carbon emissions, they would also lessen the wear and tear put on roadways by driving. And higher gasoline taxes just might discourage reckless driving at high speeds and, thereby, lessen the number of accidents and injuries.
Atlanta Fed’s GDPNow projects a second quarter lift-off by real consumer spending …
The Atlanta Fed's GDPNow methodology predicts a stunning acceleration by real consumer spending's annualized quarter-to-prior-quarter growth rate from Q1 2025's 1.2% to 4.0% for the second quarter. In turn, real GDP’s annualized quarterly growth rate is expected to jump up from Q1-2025’s -0.2% to Q2-2025’s 4.6%.
First-quarter 2025’s tariff-driven widening of the trade deficit subtracted -4.9 percentage points from Q1 2025’s real GDP growth.
In stark contrast, second quarter real GDP growth will receive a nonrecurring boost from a pronounced change in the direction of the US’ real trade deficit. After swelling by an annualized $326 billion in 2025’s first quarter, I project a $160 billion narrowing of the trade deficit in the second quarter. By contrast, GDPNow predicts a $90 billion narrowing of the real trade gap, while early May’s Blue Chip consensus looks for a narrowing of $209 billion and mid-May’s Bloomberg survey senses a $126 billion thinning.
All else being the same, GDPNow implicitly assumes that after rising by 0.1% monthly in April, real consumer spending will advance by 0.4% per month, on average, in May and June. For purposes of comparison, real consumer spending rose by 0.3% per month, on average, during the 12 months ended March 2025.
May’s -9% monthly plunge by unit sales of light motor vehicles questions GDPNow’s forecast …
A 0.4% monthly increase by May’s real consumer spending may be out of reach if only because the US’ seasonally-adjusted unit sales of cars and light trucks plunged by -9.0% from April to May. This result suggests that it’s unlikely that May’s monthly rise by real consumer spending will be much greater than April’s 0.1% uptick.
All else being the same, a 0.1% average monthly rise for May and June puts Q1 2025’s annualized sequential increase by real consumer spending at a still admirable 3.0%. Thereafter, slower jobs growth and the bringing forward of spending on tariff-vulnerable items will take its toll. Real consumer spending may grow no faster than 1.2% annualized from the second to the final quarter of 2025.