Atlanta Fed Model Suddenly Signals US Recession As Stagflation Takes Hold

A recession is imminent…

The Atlanta Fed’s GDPNOW model  – forecasting US economic growth – just downgraded its estimate of Q1 2025 GDP growth (or lack of it) from +2.3% to -1.5%…

After recent releases from the US Bureau of Economic Analysis and the US Census Bureau, the nowcast of the contribution of net exports to first-quarter real GDP growth fell from -0.41 percentage points to -3.70 percentage points while the nowcast of first-quarter real personal consumption expenditures growth fell from 2.3 percent to 1.3 percent.

Put a different way, spending less on transsexual Guinea pigs in Bora Bora means US GDP gets hit.

It does make us wonder how a ‘model’ of economic growth can swing 380bps into contraction from trend growth in a week… but hey, propagandists gonna propaganda.

Who could have seen this coming?

Well we did!

Here’s the bigger play at hand, and why there is only token pushback to DOGE.

You cut enough spending – even if it’s all grift and fraud – you eventually get a recession, guaranteed. That’s all Congress is waiting for cause then they use the “emergency” to vote through a far…

— zerohedge (@zerohedge) February 8, 2025

And here is Mizuho’s Dominic Konstam just yesterday confirming the narrative perfectly…

DoGE-led recession risk?

The market is focused on a negative economic fall out from Federal spending cuts. The level of potential Federal job losses are too small to derail growth but overall government spending has been egregiously high in recent years. There has also been excessive job growth in the “government+” sectors including federal, state and local government and in education and health. If DoGE sets a precedent on jobs and achieves spending cuts that ricochet through the quasi-public sector, it is likely that new economic headwinds will develop.

The Fed is not cutting rates anytime soon but that restrictive policy stance bodes well for inflation containment.  There are clearly still “seasonal” related bumps in inflation but we are a far cry from any trend rise in inflation. We remain confident that the disinflationary process is intact, more so with the Fed on hold.

The real focus is on what kind of “new” economic order is in store for the global economy. We lay out a framework for Trump 2.0 that rests on two key principles: rebalancing trade and lowering rates.  We see a tariff regime with different dollar outcomes as juxtaposed to a more cordial Bretton Woods 2 (BW2)/ Mar-a-Lago accord that overlays new (global) fiscal priorities and includes the debt-for-security swap. We show that market pricing is not too far off assigning a relatively large weight to a tariff outcome with stronger dollar. With growth headwinds the Fed will be able to get-off-pause, easing once disinflation resumes.

The curve has retained much of its steepness despite the belly more recently driving curve direction (bullish flattening/bear steepening 210s). We think the recent flattening “relief” reflects an appropriate repricing against the bear steepening fears initially triggered around Trump 2.0. Our yield curve analysis in the context of likely net supply outcomes and Fed reaction do allow for further curve re-steepening but only bullishly, on a sustained basis. Net supply alone doesn’t (bearishly) steepen the curve much. A proper bear steepening with the Fed priced not to cut much, requires a shift higher in Fed expectations. This in turn would likely need to reflect rising inflation expectations and a Fed unwilling to hike. At least for the Powell Fed this seems unlikely, in our view.

Our preferred view is that we will get more tariffs with a strong dollar. Despite the headline rhetoric, the effective tariff rate is still likely to be diluted (closer to 10 than 30 percent, that’s what reciprocity means!) – the one-off price impact is less than otherwise. With growth headwinds mounting, we think investors should accumulate duration on yield set back with the curve still being pressured flatter. Come q2 we expect this to segue into bullish steepening on resumed disinflation.

February was an absolute shitshow for macro data with inflation surprising to the upside and growth drastically surprising to the downside. Put together, they form the Fed’s nemesis - Stagflation!

All of which could be seen as good news for Trump: he can impose tariffs (inflation) AND the Fed will be forced to cut rates (growth).