The short explanation is recession. The long answer is more complicated and related to tariffs.
GDPNow Plunge Background
The background to the plunge is important. It’s trade related caused by tariff front running.
On February 28, 2025 I commented In Scramble to Beat Tariffs, Trade Deficit Soars by Amazing 25 Percent
The advance rush to beat tariffs hugely distorted trade data in January.
On March 1, I commented GDPNow Nowcast for 2025 Q1 Plunges to -1.5 Percent on Trade Data
Factoring Out Imports
If we remove the impact of imports, the Nowcast would be ~+1.50+- instead of -1.50. That’s a decline of 0.80 PP from the previous forecast.
In the above post I discuss percentage point contributions to the GDPNow forecast. Much of the plunge was due to trade, but about 0.80 percentage points was unrelated.
Percentage Point Change in Net Contributions to GDP from Feb 28 to March 3
- PCE Goods: From -0.10 to -0.70 (-0.60)
- PCE Services: From +0.97 to +0.71 (-0.26)
- GDPI Residential: From +0.06 to -0.20 (-0.26)
- GDPI Nonresidential: From +0.56 to +0.22 (-0.34)
- Imports: From -3.72 to -3.27 (+0.45)
- Exports: From +0.02 to -0.30 (-0.28)
The net of the above is -1.29 PP.
The total change in Gross Private Domestic Investment (GDPI) of -0.6 PP is due to Monday’s construction report. The rest relates to ISM.
For discussion of construction, please see Construction Spending Was Weaker Than Expected in January
The report was not good, and the GDPNow model did not expect this weakening.
It’s important to note that the model reacts to its expectations, not market expectations. Sometimes GDPNow reacts positively to weak data.
The only major releases between February 28 and today were construction spending and ISM. So, there was something the model really did not like about ISM.
For discussion of ISM, please see A Weak ISM Report Shows New Orders and Employment Back in Contraction
The report was not good, but the GDPNow model thought it was even worse than I did.
Three Key ISM Components
- New Orders: -6.5 PP to 48.6 from 55.1
- Production: -1.8 PP to 50.7 from 52.5
- Employment: -2.7 PP to 47.6 from 50.3
GDPNow reacted very negatively to that data.
Factoring Out Imports
Net trade accounts for about -3.0 PP of the decline starting February 28.
If we factor out imports by adding 3.0 PP to the model, we arrive at a GDPNow base forecast of +0.20 percent and Real Final Sales of -0.20.
Real Final Sales
The important number is Real Final Sales not the baseline forecast. The difference between the two is Change In Private Inventory (CIPI) that nets to zero over time.
In practice, factoring out the entirety of trade is like wrong so the numbers would both be a bit worse.
Thus, my revised estimate of the GDPNow Nowcast for Real Final Sales is -0.20+-.
What About Gold Imports?
There is a further complication to the GDPNow calculation related to gold imports. However, by factoring out all trade data, I also factor out the issue with gold.
I will discuss the gold factor later today.
Recession?
I already assumed one for May-June of 2024 (early again). I never took that call off, so perhaps I was 6-8 months early. We will see.
The key point is the sudden weakening of GDPNow Real Final Sales by three full percentages points since February 28, unrelated to tariff distortions.
Weakening Economy Synopsis
Jobs, housing, retail sales, and construction were already weakening. Immigration is down at least 85 percent.
Immigration will no longer fuel spending, nor will immigration add to the need for state-and-local jobs related to health care and assistance services.
For a detailed list of weakening data, please see Welcome to the Recession, Trump Hits Canada and Mexico with 25 Percent Tariffs
Finally, we have not yet felt the hit on small manufacturers do to extremely unwise tariffs.
For discussion of the small business hit, please see How One Small Business Owner Is Coping With Trump’s Tariffs
Fifty-four percent of small businesses polled said that tariffs would negatively affect their companies, while just 11 percent said they would benefit.
Please read the above post and multiply it by tens of thousands of small businesses.
Welcome to the recession.