Ketu Desai
By Ketu Desai
The outlook is quickly changing as major portions of the economy are flashing warning signs, including housing, government, and consumer spending; nearly two-thirds of all US expenditures. The Atlanta Fed GDPNow tanked in just weeks, now running at a negative 1.5% for the first quarter. The Citigroup economic index has also shifted into negative territory with a drop of over 30pts in just five weeks.
We are starting to see the impact of high rates and prices hitting housing. Homebuilder stocks are down 11% over the last month. Toll Brothers reported a poor earnings report in which they said that their average selling price was down 7.74%. Each component of the Wells Fargo Housing Market Index was down in January, ranging from prospective buyer traffic to builder confidence. Housing starts have started to roll over. Historically, each time starts have rolled over, it has led to a meaningful economic weakening. Housing is approximately 15% of the US economy, as it moderates, it is a headwind to growth.
We are entering a new regime of shrinking government. Fiscal growth in recent years has been one of the primary reasons that the US has outperformed the rest of the world. US nominal growth was up 50% over the past 5-years was driven by US government discretionary spending, up 65%. With that support now gone, a major driver of economic growth is gone. DOGE is leading the charge. It’s only been a few weeks, but the total savings are estimated at $65bn. Congress is signaling that they want further fiscal tightening. They passed a budget which calls for $1.5-$2 trillion in spending cuts.
While it is to be seen whether DOGE or Congress will reach their goals, the point is that the government is now in a headwind to growth. Unemployment claims in the DC area have already skyrocketed. This will impact surrounding ecosystems including defense, lobbying, consulting, and local business and real estate. It is estimated that for every federal employee there are two contractors. The collateral damage could lead to approximately a million layoffs.
It’s not just the government that is letting people go. We are seeing layoff announcements across corporate America. Some notable ones already in 2025 include Meta cutting 5% of its workforce, Southwest cutting 15%, Chevron cutting 8,000 employees, JPM reporting rounds of layoffs, Starbucks cutting 1,100 jobs, and United Healthcare offering buyouts. These announcements have already led to consumer weakness.
Retail sales also fell nearly 1% in January, the most in nearly two years. Walmart cut guidance for the year. Consumer sentiment indicators are weakening, while service PMI is in contraction. Consumer delinquencies are on the rise, with personal spending lowering to counteract it. Initial unemployment claims have jumped 17% since the end of January; the majority of these being white collar jobs which will have a disproportionate impact on overall spending.
The combination of housing, government and consumer is a major headwind to growth. When more than two-thirds of the economy is in flux, that is a lot to overcome. After nearly being cut in half, the time might be here to take a position in long duration treasuries. They will get double benefit from weakening growth and lower issuance due to a lower deficit as DOGE continues its progress. Positioning is way offsides, with an all-time high in short positioning in the TLT (long bond ETF). After many years of equity put, the put is now in the Treasury market.
During an inflationary environment, treasuries were a drag to a portfolio. During a growth scare, Treasuries will not only hedge the portfolio but be a source of return.
Looking forward, the market will focus on a Fed meeting, the latest in Washington with geopolitics, and economic data.
Ketu Desai is the Principal of i-squared Wealth Management Inc. (www.isquaredwealth.com), an investment management firm based in New Jersey. [email protected]
