Today’s blog will be short and to the point, focusing on the SHI and the FED minutes, released earlier today.   But first, I have a really cool graphic to share with you, thanks to JPMorgan Securities.

 

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:

 

‘Tariff-ied” might be a bit strong.   Yes, I’m having some fun with hyperbole.   But as you’ll see below, I have plenty of reasons for concern.   

Keep reading.

But first, here’s an image I clipped from a JPMorgan economic analysis discussing the budget reconciliation bill that just passed the House … now on its way to the Senate.   We all know about that bill — called something like the “Big Beautiful Bill” or similar by our lawmakers.    However, there’s a ton of confusion — at least to my eyes — about the budgetary implications of the bill.   Will it increase deficits as many fear?   Or will it fuel economic growth as its proponents hope? Time will tell.   In the interim, the folks over at JPM have done a masterful job of parsing the bill and showing the details of how they believe it will impact spending.    The bottom line:   They believe this bill will increase our national debt by $2.3 trillion over 10 years.  Remember:   They always use a 10-year window when discussing the fiscal impact.   Take a look:  

 

 

 

That second item called the “TCJA extension” is quite expensive, according to JPM.   This is because this bill makes permanent the 2017 “Tax Cuts and Jobs Act” tax cuts.  They were previously set to expire at the end of 2025.   Back in 2017, the TCJA reduced individual income tax rates, expanded the ‘standard deduction’, and increased child tax credits, among other things.   

Should these be made permanent now?  You decide … but no matter how you slice it, they are an expensive change to the tax code, reducing tax collections significantly.   Will these changes help maintain strong GDP growth — or conversely, if NOT enacted, would the economy weaken appreciably?   It’s hard to tell.   Our economy is complex and dynamic.   In any event, I wanted to share this graphic.  It’s very impressive. OK, let’s jump over to the SHI.   

Here is this week’s SHI grid:        

 

 

I see a lot of red.    That’s not good.   Unless we’re talking about a rare steak.   Then red is good.  But not here.   

I’ll talk about the larger trends below, but for now, take a closer look at “The OC” restaurants.   They include the Mastros Ocean Club — a perennial favorite of the Newport Beach crowd — as well as ‘The Ranch’, Ruths’ Chris, and the lovely expensive steak house restaurant at the Monarch Beach Waldorf Astoria resort, ‘The Bourbon Steak House.”    Today — Wednesday — you can easily book a table for 4 people on Saturday evening at 7:30 pm.   I don’t believe this has happened in many, many, many weeks.   Reservation demand, at this moment, feels quite weak here in the OC — a known bastion of wealth.   

Are the wealthy feeling the pinch?  Is this weakness the result of extensive economic uncertainty and discomfort American businesses and wealthy individuals are likely feeling these days?   That’s likely, but we’ll need a few more weeks of low SHI readings to solidify this belief.   

An SHI reading of “6” is very low.   For a year or more, The OC was hanging in the high-50s.   No longer.   There’s a lot more red than blue these days.  

That’s why I’m a bit tariff-ied.   🙂

Here’s the longer term trend chart. 

 

 

As you can see above, only Atlanta saw tightening reservation demand in the past week.   But an SHI reading of “21” is not a historically strong reading here either.   No, with the exceptions of Atlanta and ‘Vegas, this week the SHI index is down everywhere.   

This is not good.   

Let’s move on.   The ‘Minutes’ of the Federal Open Market Committee (FOMC) were released today.   At that May 6–7, 2025 meeting, the FED left the federal funds rate unchanged at 4.50%.   This much we knew on May 7^th.   

However, today we learned the FED  heightened economic uncertainty  due to recent tariff uncertainty and, as a result, they kept short-term rates consistent and – by historic standards – relatively high.    In fact, a few committee members suggested supply chain disruptions caused by tariffs also could have persistent effects on inflation, reminiscent of such effects during the pandemic.  

Below are the key takeaways:

Inflation Concerns:  Almost all 19 FOMC policymakers expressed concern about inflation.  In fact, the word “inflation” appeared 71 times in the document.   Most are worried inflation could be more persistent than anticipated – and, in fact, it could be more worrying than potential rising unemployment.  

Tariff Impacts:  The Trump administrations tariffs have created a dual challenge for the FED:   On one hand, the tariffs may trigger elevated inflation.   As you know, the FEDs “tool” to deal with unwanted inflation is to raise short-term interest rates.  At the same time, many committee members fear the tariff uncertainty may slow overall US economic growth, in which case the FED typically cuts rates. This dilemma has led the FED to adopt a cautious, wait-and-see approach.  

Labor Markets:   The committee is worried about the labor market.   Quoting the text from the minutes, “The labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff’s estimate of its natural rate by the end of this year and remaining above the natural rate through 2027.”

 

This is a rather ominous sign.  

To say the labor market is the foundation of the US economy would be an understatement.   I underlined “above the natural rate” in the paragraph above.  What is the “natural rate of unemployment?”   An economist would tell you that the natural rate of unemployment is the lowest unemployment rate possible before inadequate labor availability triggers a wage inflationary spiral.  It’s a bit of a moving target, however the FED ‘estimates’ the natural rate currently to be about 4.6%.   And, interestingly enough, at 4.2% the unemployment rate is below the “natural rate” we’re discussing here.   Yet inflation is not accelerating??? … but declining?  Yes.   Odd but true.   Again, it’s complex.   

Regardless, the FED is expecting the US unemployment level to increase meaningfully in the coming months and years.  

The unemployment rate is presently 4.2% — a low rate by historic standards.    Say for the sake of argument that rate were to rise by 1% to 5.2% — following the FEDs fear here — within 6 months or a year.    That increase would add another 1.65 million people to the unemployment lines — on top of the 7.2 million presently unemployed.    Not good.    But we need to remember this is a “fear” of the FED, not an actual forecast, resulting from all the current uncertainty.  

 

Stagflation Risks:  The FED also fears stagflation – a condition where economic growth is weak while prices simultaneously rise faster than desired. Staff economists revised down growth forecasts, anticipating a weakening labor market and elevated unemployment through 2027.   I fear this too … but I am not as concerned as they are.  Yet.  

Business Responses:  Surveys indicated that many businesses plan to pass increased costs from tariffs onto consumers, potentially intensifying inflation. Some firms not directly affected by tariffs might also raise prices if competitors do so. 

 

In summary, the FOMC members are clearly navigating a complex economic landscape marked by persistent inflation risks and potential GDP growth concerns due, primarily, to recent trade policies.  For this reason the FOMC opted to hold rates steady, for now, while keeping a finger firmly on the pulse.   

They seem a bit tariff-ied too.  

How are you feeling?   🙂

<(:  Terry Liebman  :)>