Look at that!    Two fun words in close succession!   ‘Doppelganger‘ and ‘hodgepodge.’  You don’t get to use those two in a sentence every day!

 

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:

 

It wasn’t that long ago when the Atlanta FED was predicting a Q1, 2025 GDP contraction of 2.8% on an annualized basis.   In fact, here’s the blog I wrote on that topic.   Take a look.

 

SHI 3.5.25 – You Don’t See This Every Day

 

Shortly thereafter, the ‘first estimate’ of Q1 GDP was released on May 29th by the US Bureau of Economic Analysis, suggesting that GDP did, in fact, contract during the first quarter of this year at the annualized rate of 0.2%.    Sure, that’s not good — a contraction never is — but 0.2% is a whole lot better than a 2.8% contraction!

Time passes, and now we move on to the second quarter.   Economic conditions haven’t improved much, of course, so what is the Atlanta FED forecasting for  GDP in Q2?  Is a second quarterly contraction expected … possibly pushing American into its first technical recession since the start of the pandemic? 

Nope.   Quite the opposite. 

As of June 2nd — 2 days ago — the Atlanta FEDs is forecasting Q2 GDP growth of 4.6%!  Of course, much of the improvement in Q2 is related to “net exports” and “change in private inventories” bouncing back from Q1.   These two categories subtracted about one full percentage point of growth last quarter.   This quarter, net exports is expected to add over 1.3% to the GDP number.    You don’t see this every day either.   

 

Essentially, the Q2 forecast reflects a “bounce back” or recovery from the disruptive tariff announcements in the middle of Q1.   Neither, in my opinion, represent the true nature of today’s economy.  I’ve had a few folks ask me if these numbers are accurate metrics.   “Accurate” is probably a debatable term to be frank; however, the methodology itself is  consistent.    It bears repeating:   Just like the SHI itself, the calculation methodology is consistent month after month, quarter after quarter.  I’m comfortable with that.  

 

OK, let’s get back to the Matterhorn and its doppelganger.  

The Economist magazine wrote a piece titled “China is waking up from its property nightmare” on June 1st.    And quite a nightmare it has been:

 

“Property, broadly defined, contributed about 25% of GDP on the eve of its crash in 2020. It now represents 15% or less, showing how the slump has been a huge drag on GDP growth. The depressive impact of falling prices on ordinary folk is hard to overstate. In 2021 80% of household wealth was tied up in real estate; that figure has fallen to 70%. Hundreds of developers have gone bust, leaving a tangle of unpaid bills. The dampening of confidence helps explain sluggish consumer demand.”

 

From 2020 thru right about now, the ‘transaction value’ of new home sales plummeted, resembling the exceptionally steep slope of the Matterhorn.   

On the right is the actual graphic from the magazine.

Frankly, both the assent and descent are staggering — from an economic perspective.   No doubt, movement like this is very bubble-like.   It’s hard to imagine any developed economy where 80% of the household wealth is tied up in housing.   

For context, here in America where household net worth is almost $170 trillion (and total household assets are over $190 trillion), households own ‘real estate’ worth about $48 trillion; after deducting ‘outstanding mortgages’ of about $13 trillion, households have about $35 trillion of home equity — just over 20% of the net worth total.   Meaning, of course, that almost 80% of American household net worth is held in assets outside than their homes.

And while The Economist magazine article contends that one can “make a decent case that the end is in sight,” I am not convinced.   Sure, new home transaction value may have recovered a bit here in 2025 — it was down 17% in 2024 — I don’t think China can declare victory here quite yet.  

The article does share the fact that “one of the biggest problems” China has right now is the fact that millions of homes were built but never sold.  At the end of 2024, that number was 80 million!  And anyone who has ever owned a home knows that you can’t ignore it:   Your home may not be a “money pit” per se, but it does demand near constant maintenance, right?  Mine certainly does.   Something is always breaking or falling apart.   

In any event, we’ll keep a close eye on developments here.   It’s an interesting story. 

Moving on:   Did you know that M2 is once again growing?  That’s right.  After skyrocketing post-Covid, US money supply (commonly called ‘M2’) started heading down around the same time the FED began their rate hike campaign.   Take a look at the graphic below:

 

 

M2 can grow for a variety of reasons.   Massive federal stimulus is one way.  Another is an increase in bank lending.  That’s right.  Bank lending.   Typically, when a bank makes a new loan, they create a corresponding deposit within their bank effectively increasing M2 by an equivalent amount.   Commercial bank lending has been resurgent this year, up 3% overall in the first quarter.   Consumer lending, a sub-component, was up 5.7% in Q1 according to the NY FED. 

Why is this important?   There is a delicate balance between GDP growth and M2 growth.   Inadequate M2 growth constrains our economic growth.   But too much, as we saw earlier this decade, can be an inflation trigger.   Anyway, even though M2 has now reached a new, all-time high, its current growth rate is not so fast as to be alarming.   

To the steak houses?   What are perfectly grilled T-bones from Mastros telling us about the economy today?  

 

 

Well, we see some recovery in reservation demand this week over last.   Here in the OC, demand remains unremarkable by historic standards.   Most other cities show either minor demand improvement or, at least, relative stability.   

The FED released the updated Beige Book earlier today.  The bottom line:  out of the 12 FED districts, six reported slight to moderate declines in economic activity, three observed slight growth … and in three, no change.   All in all, there’s not much here to celebrate or panic about.

It will be interesting to see how the Atlanta FED moderates its “GDPNow” forecast in the coming weeks.   Will their forecast begin to emulate the feelings portrayed in the Beige Book, or is the economy actually holding up well given all the economic and political uncertainty floating around these days?   

I don’t know about you, but I’m pretty excited about all this stuff!  🙂

<:  Terry Liebman  :>