Atlanta Fed model predicts GDP to shrink 2.8% in Q1: Trumpcession
The US economy could be shrinking at its fastest rate since the COVID-19 lockdown, according to the Federal Reserve Bank of Atlanta’s GDPNow model, which is now forecasting America’s gross domestic product to fall 2.8% in the first quarter.
The new forecast differs immensely from just a month ago, which estimated America’s GDP was tracking close to a 4% growth for Q1.
While GDP trackers like the Federal Reserve Bank of Atlanta can be volatile, several economic indicators also support the downward trend, which could also spell trouble for the crypto markets too, should a global liquidity crunch and more geopolitical conflict ensue.
The possible GDP fall could trigger the start of a Trump-inflicted recession, or “Trumpcession,” as some call it. America’s GDP hasn’t shrunk by more than 2.8% since Q2 2020, where it fell 32.9% as the world went into lockdown from the COVID-19 pandemic.
Change Atlanta’s Fed’s GDPNow estimates in Q1. Source: Federal Reserve Bank of Atlanta
The estimated fall may have been contributed by America’s record-high $153 billion trade deficit in January, the Census Bureau reported on Feb. 28. The 25.6% trade deficit increase from December likely came as a result of businesses front-loading imports before President Donald Trump implemented his first round of tariffs.
A Feb. 25 survey from The Conference Board showed the consumer confidence index sank from 105.3 points to 98.3 in February — the biggest month-to-month fall since August of 2021.
Consumer spending also fell 0.2% in January — though only 11 days occurred under Trump — while investor and billionaire Warren Buffett reportedly believes Trump’s tariffs could fuel more inflation and hurt consumers.
Macroeconomic concerns have been blamed for the recent slump in crypto prices, which has Bitcoin (BTC) and Ether (ETH) down 10.2% and 21.6% over the last two weeks.
Despite Trump’s promise to make America the “crypto capital” of the world — in part through forming a Crypto Strategic Reserve — more than $670 billion has been shaved off the total crypto market cap since he was inaugurated on Jan. 20.
Related: Trump’s crypto reserve plan faces Congress vote, may limit rally
Not all GDP models have a grim outlook like Atlanta’s Fed’s GDPNow model.
The Federal Reserve Bank of New York’s model forecasted a 2.9% increase for Q1 in its latest Feb. 28 update, while the GDP tracker from the Federal Reserve of Dallas predicted a 2.4% increase on Feb. 27.
Atlanta Fed GDPNow model mimics the methods used by the Bureau of Economic Analysis to estimate changes in GDP, while the New York one applies Bayesian estimation and adopts filtering techniques to assess a broader range of data.
The Federal Reserve of Dallas places a greater emphasis on state-level data to gather a more localized perspective on how economic growth is tracking.
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The latest forecast from the Atlanta Federal Reserve’s GDPNow model indicates a potential contraction in the U.S. economy, projecting a 0.3% decrease in real GDP for the first quarter of 2024. This revision comes after the recent release of economic data that revealed a slowdown in both personal consumption expenditures and business investments.
The GDPNow model’s update reflects the Fed’s responsiveness to incoming economic indicators. Initially, growth had been anticipated following a series of robust consumer spending reports; however, increasing evidence suggests that both inflationary pressures and rising interest rates may dampen economic activities. Analysts are now closely monitoring these trends as they evaluate the broader implications for economic policy and recovery efforts.
Personal consumption expenditures (PCE)—a critical component of GDP—grew at a considerably slower pace than economists had forecasted. The latest estimates indicate only a 0.9% increase in PCE, substantially below previous expectations. In tandem with the sluggish PCE figures, businesses are reportedly scaling back investments, another signal that could potentially lead to diminished GDP growth.
This assessment by the Atlanta Fed aligns with persistent concerns regarding the potential fallout from Federal Reserve interest rate hikes aimed at curtailing inflation. As borrowing costs rise, both consumers and businesses may tread more cautiously, prompting a reevaluation of their spending strategies. The interplay of these factors raises questions about the sustainability of economic momentum in the coming months.
Further weighing on growth prospects, initial jobless claims have begun to rise, indicative of possible labor market softening. The labor market has been a cornerstone of economic resilience; however, increasing claims signal that businesses may be preparing for a more cautious outlook as economic uncertainty prevails.
Market reactions to the GDPNow revision reflect a broader wariness among investors. Financial markets are attempting to gauge not only the implications of shrinking GDP but also how the Federal Reserve will adjust its monetary policy in response to evolving economic conditions. As the Fed navigates this complex landscape, its decisions will significantly influence the trajectory of U.S. economic growth as we move into 2024.
Analysts emphasize the need for vigilance as the economic landscape continues to shift. Upcoming economic indicators, including consumer confidence, inflation data, and labor market reports, will be critical in shaping expectations. The ongoing assessments by the Atlanta Fed and other economic entities will provide essential insights into whether the anticipated contraction becomes reality or if shifting circumstances will steer the economy back to growth.
