Econ Intel Brief - April 16, 2025
On today's industrial production data, and warnings about a $6 trillion deficit hike
All,
In today’s EIB, please find:
Key Takeaways from Today’s Industrial Production Report
Tax Cutters, Beware Bond Market Vigilantes
RecessionWatch: Still Unlikely, But Increasingly Probable
Preview of Upcoming Data Releases
Recommended Recess Reading
For questions, suggestions, or to arrange an in-person briefing or witness testimony, email chris@russoecon.com or call/text (908) 947-5166.
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Best,
Chris
Key Takeaways from Today’s Industrial Production Report
At 9:15am ET, the Federal Reserve announced that in March:
Industrial production (IP) fell by 0.3% m/m (led by utilities) and rose 1.3% y/y.
Utilities: -5.8% m/m (due to atypically warm weather)
Manufacturing: +0.3% m/m
Mining: +0.6% m/m
Capacity utilization: 77.8% (ticked down due to the fall in utilities)
Vehicles produced: 862,500 (including 753,333 trucks)
IP for February was revised up by 0.1%. None of these data portend a recession.
Tax Cutters, Beware Bond Market Vigilantes
The House has adopted the Senate’s amended budget resolution, which allows for:
$5.3 trillion of deficit-financed tax cuts ($3.8 trillion of which is “current policy”);
$0.5 trillion of deficit-financed spending on defense and immigration; and
$5 trillion increase in the debt limit.
While these figures are maximum allowances, there will be immense political pressure on fiscal conservatives to vote for a deficit-busting reconciliation bill. The need to raise the debt limit by late summer or early fall puts Congress on a shot clock.
However, a reconciliation bill adding nearly $6 trillion of debt would pose significant economic and financial risks. It would likely be inflationary, crowd out private-sector investment, and raise borrowing costs for the government, businesses, and consumers.
Sovereign creditors are becoming wary of fiscal imbalances. E.g., the UK’s 2022 deficit-financed tax cuts led to a bond market collapse, currency devaluation, and financial market stress (particularly for LDI pensions). Similarly, the U.S. saw a 20% rise in consumer prices following the deluge of deficit increases under President Biden.
The ongoing trade war complicates deficit risks. Insofar as tariffs reduce our current account deficits, they will also limit the capital account surpluses required to finance government deficits. Domestic market participants may struggle to absorb additional Treasury debt without Federal Reserve intervention. The market’s reaction to the large flow of Treasury issuance after the debt limit is raised will be key to watch.
I support permanent pro-growth tax reform, but fiscal conservatives should be cautious about the consequences of a deficit-increasing reconciliation bill. Congressional Republicans should seek significant savings through spending cuts and tax code reforms.
RecessionWatch: Still Unlikely, But Increasingly Probable
Key indicators remain healthy.
Real GDP forecasts remain mixed.5
Atlanta Fed GDPNow: -2.2%
Gold-adjusted: -0.1%
New York Fed Staff Nowcast: +2.59%
St. Louis Fed Economic News Index: +2.87%
Financial indicators are mixed.
S&P 500: falling (-12.2% from Feb 19 peak)
Term premium: flat (0.0%)
Credit premium: rising (+4.6% on April 7)
Consumer bank loans: rising
Alternative indicators are mixed.6
Domestic box office gross: rising (+146% wk/wk)
OpenTable bookings: falling (-9% y/y)
Indeed.com job postings: falling (-10% y/y)
TSA air travelers: flat
Temp staffing: falling (-7.6% y/y)
Announced job cuts: rising (+60% m/m, +205% y/y)
Broadway attendance: rising
Consumer sentiment is plummeting.
UMichigan Index: down (-10.9% m/m, -34.2% y/y)
2nd-lowest observation on record after June 2022 (40y high inflation)
This sentiment reading is unhinged and I put almost no stock in it.
Conference Board Index: down (-5.5% m/m, waiting on April figure)
Preview of Upcoming Data Releases
BEA will release its “advance” estimate for Q1 real GDP growth on 4/30 at 8:30am ET, with forecast varying widely.
Options markets are pricing an 82% chance that the Federal Reserve will hold interest rates steady at its next monetary policy meeting (May 6-7), with an 18% chance of a 0.25% cut. The current target range for overnight rates is 4.25% to 4.50%.
Recommended Recess Reading
The payroll survey counts non-farm business payrolls. The household survey counts employed people including (e.g.) the self-employed and agricultural workers. See here.
While the estimates from the establishment survey have greater statistical precision, the household survey may be a better gauge of the turning points of the business cycle. At the start of an expansion, the establishment survey may undercount jobs from newly created businesses. At the start of a recession, the establishment survey may overcount jobs from newly failed businesses. While the BLS attempts to adjust for this bias using a model of firm “births and deaths,” employment data from the household survey is a useful check.
Construction and manufacturing are particularly cyclical sectors of the U.S. economy.
Industrial production includes manufacturing, mining, and electric and gas utilities. Capacity utilization measures the rate of industrial production as a share of potential sustainable output. Capacity utilization falls during recessions as production falls.
Real personal income ex. government transfers includes individual income received from all sources (e.g., wages, salaries, and investment income) except for government benefits, and is adjusted for inflation. This figure falls during recessions as individual income tends to fall.
Forecasts are for q/q real GDP growth, expressed at a seasonally adjusted annualized rate.
Alternative indicators are an extremely noisy (but timely) barometer of economic conditions. If the “key indicators” tell you about where the U.S. economy was a month ago, the "alternative" indicators give you a hint about where the economy is today.