Will Rogers had a quip about Oklahoma, “If you don’t like the weather, wait a minute.”   I feel I can say something similar:  “If you don’t like the tariff news, wait a minute.”   There’s a good chance it will change. 

Ostensibly, in the beginning, the DOGE plan was to tame the runaway-spending monster that DC had become.    You’ll recall the $2 trillion figure Musk quoted a few months ago, expecting to trim that amount off the annual budget?   I’m not sure if that figure remains the target — lately, I’m hearing a number closer to half that amount — but that aside, I find myself amazed by some spending revelations.  Consider this one, sourced ironically by the  Economist Magazine  and not yet (at least, that I’m aware of) on the chopping block:  Consulting firms.   Apparently, in recent years they have been heavily rely on the federal government for a growing share of revenue.    But that is likely to change.   DOGE  has requested a comprehensive review of consulting contracts and intends to terminate those deemed “non-essential.” 

 

“Accenture has received $700 million from the Department of Education since 2019 to build and manage a website, mobile app and virtual assistant for student aid.”

 

What?  Excuse me, but 700 MILLION DOLLARS for a website and mobile app?   Really?   You or I could do it for a fraction of that amount.  Heck, I suspect a lowly assistant at the DOE could do it in half an hour using the tools at GoDaddy and Shopify.    Non-essential?   Check.  

Regardless, let’s talk about what they are doing over there in the White House… at least, what I think they’re doing … and the impact of those actions on consumer psyche and the economy at large.   🙂

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

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Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

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The Blog:

 

Everyone, world-wide, is glued to their favorite news-spewing device these days.   Because the news out of Washington DC is copious, fast and furious.  Say what you want about the Trump Team, they definitely hit the ground running. 

 

There’s no argument:  We’re seeing seismic shifts in America’s corridors of power.  Love it or hate it, the activity is surprising from a place that is usually so slow and methodical.  Of course, the play-book for DOGE came right out of the Issacson’s biography on Elon Musk.   If you haven’t yet read it, you should.   I did and wrote about it in a prior blog — here’s a link to that blog from a couple months ago:

SHI 12.4.24 – DOGE

Elon does not conform to conventional wisdom in either thought or behavior.   And he clearly likes to break stuff.  His attitude and beliefs are clear:   If he goes too far, and breaks too much stuff, he’ll likely admit it and “un-break” it as best he can, reversing the overreach. 

But in their pursuit of “just right” as Goldilocks might say, Trump and DOGE appear to be executing a brute-force, no-holds-barred cost-cutting-campaign that might — I would even say, is likely to — go to far.  Many people, I suspect, would opine they already have.   But, in this case, I’m using “too far” as an economic descriptor:   Could efforts from this duo end up destroying the US economy, as measured thru the lens of economic growth and GDP?   Remember, about 70% of the US economy is consumer-consumption based, isn’t the attitude of the consumer paramount for continued strong economic growth?

Ironically, “destruction” is not a new economic concept.    Joseph Schumpeter was an Austrian economist, considered to be one of the most influential economists of the early 20th century.  In his 1942 book, Schumpeter described “creative destruction” as a process of industrial mutation that destroys the old economic structure while creating a new one.   He considered it “the essential fact about capitalism.”   In Schumpeter vision, new innovations replace older, outdated technologies or industries, leading to economic growth, like when the invention of the automobile essentially “destroyed” the horse-drawn carriage industry by providing a faster, more efficient mode of transportation, creating new jobs in car manufacturing and maintenance, while concurrently destroying carriage-related businesses; this is considered a classic example of creative destruction.

Is this the theory behind the blitzkrieg efforts to smash and slash thru costs and regulation, alike, all in the name of fiscal efficiency?   Perhaps.   Time will tell.   But in the interim, their collective actions appear to be making the consumer very, very nervous.    Consumer-held inflation exceptions have spiked meaningfully.   And consumer sentiment has declined precipitously.  

According to the University of Michigan “Consumer Sentiment Index,” continuous tariff threats — whether rhetoric or concrete policy announcements from the White House — appear to be scaring consumers.    And unfortunately for the US economy, a frightened consumer is one that does not spend.  

On Tuesday, the US Conference Board  published the headline, “US Consumer Confidence Dropped Sharply in February.”

“In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “This is the third consecutive month on month decline, bringing the Index to the bottom of the range that has prevailed since 2022. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month high.”

February’s fall in confidence was shared across all age groups but was deepest for consumers between 35 and 55 years old. The decline was also broad-based among income groups, with minor exceptions.

The Conference Board produces quite a bit of excellent consumer survey data, which you can read by CLICKING HERE.  However, I’ll summarize with these comments:   Over all, the consumer became meaningfully more pessimistic about the future during February.   Consumers appear to be folding economic policy developments into their expectations on the trajectory of the economy.   And history tells us that this can become a self-fulfilling prophesy. 

Following the January 31 announcement that tariffs on China, Canada and Mexico would be implemented, year-ahead inflation expectations immediately surged.   And even though tariff talk was soon suspended, additional tariffs have been announced again and again; inflation expectations have remained elevated.

Consumer sentiment slid nearly 10% from January and fell for the second straight month, as measured by the UofM Survey:

 

 

The decrease was unanimous across all groups by age, income and wealth.  All five components of the sentiment index deteriorated this month, led by a 19% plunge in buying conditions for durable goods, due in part to fears that tariff-induced price increases are imminent, said the director of the University of Michigan’s Surveys of Consumers.

“Consumers’ expectations for the path of inflation worsened considerably this month; they are clearly bracing for a resurgence in inflation,” Director Hsu said. “A spike in inflation expectations is not necessarily a cause for concern, but if these views persist, it could become problematic for policymakers.”

It’s clear to me that repetitive tariff threats are sending shockwaves through the consumer psyche.   Threats of a new trade war are definitely spooking American shoppers.   Fear of rising prices and uncertain economic winds are widespread.   Uncertainty adversely impacts durable good saless, often called “big-ticket” purchases, and slash discretionary spending.  Greater levels of fear can cause consumers to stockpile essentials — think pandemic hording of toilet paper — which, in aggregate, can send inflation expectations northward. The ripple effect? Lower consumer confidence and a more jittery economic outlook.

The bottom line is this:   Whether one agrees with the DOGE and trump policy objectives, their implementation style is clearly frightening the consumer.   Short-term scares, like a Halloween horror movie, are just fine.   But continuously scaring the consumer, which seems to be the game plan right now, is likely to trigger a larger consumer reaction very much, I suspect, the opposite of what the Trump administration is intending.    And eventually, if this relentless attach on consumer confidence continues without pause, it will likely result in adverse consequences to the US economy. 

Shall we head to the steak houses?

Well the Valentines Day spike is clearly behind us. 

 

 

The spike in restaurant reservations from the day of love is far behind us.   As you can see below, this weeks SHI10 has fallen back in line with the longer term trend.  This is neither good or bad, from an economic viewpoint, and was very much expected. 

The 2/12 reading was clearly the aberration; this week, normalcy has returned.  

Which result, viewed thru the lens of declining consumer satisfaction highlighted above, is a fairly benign outcome.   The next handful of readings might be telling:   If we see continued erosion in the index, likely attributable to the consumer discomfort highlighted above, my feelings on the durability of the current economic expansion may change.  

 

 

I’ll close today’s blog with this:   I got up the courage to ask ‘ChatGPT‘ to read my last 10 blog posts and comment on its style and content.  Here’s what my new buddy ‘Chat’ had to say:  “Overall, the style is both scholarly and approachable.  It appeals to readers who appreciate detailed economic insight but also enjoy a lighter, more irreverent take on current events.” 

Bingo.  Scholarly.  Approachable.  Check and check.  Thanks Chat!

<:  Terry Liebman  :>