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.
Bulls say ignore the fundamentals and buy “cheep” stocs.
It’s Taco & Tariff Tuesday now…..market falling apart, don’t worry guys the new golden age is about to begin!
SPY puts up 30% today so far.
Canada about to announce their own tariffs.
“Cry havoc and let loose the tariffs of trade war!”
Asset price enema. We will come out much better in time.
The shortages either by fluke or design are coming big time, I will be leaving to a more benign place.
Can’t wait to see what it looks like in FY Q3. Hopefully, the trade deficit narrows significantly, but we shall see. It’s a grand experiment and one that needs to be taken.
To sit back & embrace the status quo that has gotten us $36.2T in debt with $2T deficits is simply a non-starter.
I have no idea if Trump will be successful, but let’s be very clear. There will be more than enough blame to go around, if he’s not successful with cutting into the deficit by the time he leaves in Jan 2029. Congress, not Trump, appropriates funding.
As for his trade policies, they very well might cause a recession, and in my book that will be okay. We are long overdue for one. The fake 2020 recession doesn’t count, so we’re going on 16 years.
BTW, has anyone noticed that the Debt to the Penny has been flat since Trump took office almost 6 weeks ago? And we still have $560B in the TGA as we enter into the tax collection season. I know the Treasury will eventually start issuing a lot of debt, but the goal is for these extended periods of debt calmness to get longer & longer.
If they don’t, we screwed.
I knew something was up, when I saw the Wall Street Journal, had changed its name to the Trump Street Journal. All Donald, all the time. on the masthead.
Curious turn of events in a manufactured reality, a man made news cycle, being subverted by a single man, a god, a demon by turn, a modern day Alexander the Great conquering the world a paragraph at a time.
Orange bad man in office so they can tell truth again.
The world is flat today but Trump wants to make it round again.
Trump looked up and saw the mighty dollar as the forever world reserve currency. It is our debt,but it is you problem he said to the flat world.
The oligarchs plotted against his view and it became clear to the masses, ‘When you ain’t got nothin, you gou got nothin to lose’.
I’m one of the masses.
Biden only raised prices. Trump is gonna do even better, he’s gonna raise prices and make GDP growth negative. How awesome. Stagflation party, everyone in the mud puddle!
stagflation has been creeping through the 1st world since Paulson bended his knee to Nancy Pelosi. I fear he would have prostrated himself, but likely could not arise again, due to his lack of a spine.
Imagine Treasury Secretary Hank Paulson down on bended knee before House Speaker Nancy Pelosi. He’s begging for his $700 billion bailout. Pelosi, a Democrat stalwart, blames the Republicans in the House of Representatives. Paulson replies meekly: “I know, I know.”
At least there was a little comic relief when the deal that was supposed to be… wasn’t. It famously didn’t come together in the White House Thursday night after George W. Bush was abandoned by underling congressmen in his own party.
Adding to the tension over the lack of party discipline was John McCain. With great drama, the Republican suspended his presidential campaign to play dealmaker and perhaps avoid tonight’s debate with Barack Obama (which, as it turns, out is still on).
2008, when the stage curtains stayed open and they accidentally brought up the backdrop to reveal behind the show, was just a badly aged disintergrating brick wall. The last illusion….
Posing a counter-factual world that never yet happened requires a level of vision above my pay grade and, I believe, yours. There is a range of possible worlds, from any swerve that big, and I think, among these, ours now is far from the worst-case. The only recent comparison I can imagine for bottoming out is Great Depression I and World War II. Which was almost entirely pre-nuclear. I would agree that the sequence since the Paulson knee-bend was very sub-optimal. But very very far from the end of the world, which is always a contingency with things at this scale.
No. Eventually there will be capitulation that collapses prices.
Mish I am interested in your view on how resilient the banking system is to a US recession. Whereas we now have stress testing and higher capital requirements there is still a risk from commercial property debt and shadow banking. The latter is extremely difficult to quantify. If there is a rush to liquidity then this could hammer crypto – the large holders of which will not be going through any stress testing.
I really like the recent book Beyond Banks, which explores the boundary between actual US money, as backed in the insured banking system, and all the shadow payment promises of other fintechs, blockchains and so on, that can evaporate instantly (or certainly go out of reach indefinitely) in a different system (corporate bankruptcy). I am very glad the latter have not fully infected the former, if we are indeed on the eve of a recession/credit crisis. Not that Trump hasn’t tried, with his nominations (Tether fan), family memecoin releases etc., and related public outbursts of personal incomprehension of currency and banking and Treasury integrity, in this fascinating 100 days.
Thanks peelo – will look it up.
‘Trump hasn’t done anything’: Shoppers’ hopes for inflation dashedThe president pledged to make America affordable again on day one, but as prices remain high consumer confidence has deterioratedhttps://archive.md/It7Nn#selection-1443.0-1449.129
They need to stop culling chickens. Other actions to impede inflation will take longer.
Sure, save the chickens = save the economy
Did you graduate from Wharton in Trump’s class or something?
Recession was coming anyway. It was most likely on the way in 2019, before the pulled the scamdemic to steal the election and stave off the coming economic implosion. It was a dual use scam.
So the chickens were eventually going to come home to roost. All the chaos is merely speeding things up. Which is exactly what Trump needs if he wants to try and retain the house. Get the recession going and then hope it’s quick and recovery looks like it did from the Covid recession. I think he feels like he can pull it off.
I think he’s wrong. But that is part of what I think is happening.
Pushing this economy into recession by creating investment chaos across the globe was completely unnecessary. It’s like taking a gun and shoot yourself (and your neighbors) in the foot. Total stupidity!
But the dude wants to be at the top of the league tables with Andrew Jackson, Abe Lincoln and FDR. He wants impact, an absolute value like those guys had. In a sense his downside is limited to the other 50 percent of Americans disliking him (and oh yeah maybe the world getting completely messed up), but his history/brand upside is unlimited. I’ll bet he thinks like that.
I am afraid you are trying to say that Trump is a narcissist. Pretty soon saying this will be considered treasonous, just like saying in Russia that Putin is a thug.
Yes, we are headed for a serious recession Made by Trump, and the latest downward revision does in fact not reflect an import surge. But the Atlanta Fed is also not doing itself a favor by using a mathematical model that has an obvious model defect by allowing import surges to feed through to GDP declines. In grad school you would get a fail for submitting that model.
All models fail to be 100% accurate.
True. I can live with 90%. The Atlanta Fed model is simply mis-specified.
The first step for the drug addict is withdrawal. Then the healing can begin.
“The report was not good, and the GDPNow model did not expect this weakening”….because GDPNOW is worthless
so many people mistake the model for the reality, a model always fails at some point. it is after all a small and weak subset of data meant to be easily understood, not to be absolutely correct, since it must throw away most data points to be simple, by its very definition.
That’s exactly the problem. People think it is a definitive measure of GDP and share it as if it is accurate. If the report was accurate and GDP actually declined 5% in two weeks people would be jumping off buildings. In other words, that kind of drop does not happen without people noticing. It’s irresponsible for the ATL FED to publish information that is based on “a small and weak subset of data meant to be easily understood, not absolutely correct”
Net exports were down -3.57% because importers are rushing to beat tariffs. And residential investment finally moved negative as it should, now that we’re on the verge of deporting several million illegals over the next four years.
The question is, of course, what happens in FY Q3 & beyond when the real trade wars have begun.
As you well know, changing the Titanic’s course to not hit the iceberg is going to take time.
On 2/19 GDPNOW was at 2.3%. So their estimate suddenly dropped by 5.1 percentage points in less than two weeks. BULL CRAP
This tracker is completely worthless. DOGE it now!
Print more GDP?
if we only restore USAID funding to the mystery NGO’s, all the world will be safe and sane, once the propaganda mills begin regenerating the illusion in the world’s press, in the media,
The landscape is shifting, the sands are draining beneath the castles, one must find ones footing once again. The future has been freed at the cost of the present. One must realize nothing last forever, not even GDP subsidized stasis.
The ship of state has broken free of its mooring and is once again under power across unknown seas. Be sure you have a comfortable deck chair if you have weak knees.
Beware of admonishing for whom the deck chair wobbles, for just maybe it wobbles for thee.