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Welcome to the Market Maker podcast, hosted by me, Anthony Chung, where every Friday I talk to a member of the team about what happened in markets this week. From macro themes and single stock news to cryptocurrencies and careers in finance, our aim is simple, to make finance interesting and easy to understand for everyone. So let's get to it.
Okay, happy Friday. And if you're in the UK prepping up for a sunny bank holiday weekend ahead, or I say sunny, I've actually had a look, Piers. It's not looking favourable for your shorts and barbecue, I'm afraid. I'm still going for it. I don't know. Some rain or shine, I'll be out there. Well, in this conversation, we're going to talk about specifically the US GDP print.
And so let me paint the scene for you, Piers. So this is what happened. So the US economy shrunk in the first three months of Donald Trump's second term as president.
after he's obviously sought to roll out this aggressive trade strategy. And GDP, key measure then of overall US economic growth, fell 0.3% in the first quarter of the year and on an annualized basis down 2.4% in the last quarter of 2024. The contraction of the US economy, the world's largest, is the first since the start of 2022.
You'll love this extra bit of source that Bloomberg put on that stat. They said that that puts the US on the brink of a technical recession defined by two quarters of negative growth, which we'll probably go on to discuss as a wholly unnecessary statement to make. But they also said that the drop in activity comes amid a huge fall in consumer sentiment
which in April dropped 32% to its lowest level since the 1990 recession. I will touch on the tech stocks. Those ad sales, a little bit contradictory to that consumer sentiment, perhaps would suggest. What we're going to talk about though, and what I want to hear from you, Piers, is not just that doom and gloom opening statement and the contraction of the US economy. Rather, the GDP drop isn't as bad as it looks.
What is it that we should be really looking at? And why is this GDP print actually nowhere near as bad as perhaps the headlines would suggest? What were you quoting there? Bloomberg, an article in Bloomberg. There's only one single thing that's correct about that entire article. One, and that's the minus 0.3% GDP figure. The entire rest of the article is false. Here's why.
Basically, this is a... I love the nuance of economic data. And so there is always scope for misinterpretation. If you're new to this stuff or you don't fully understand it, and actually this is one of the best examples I've ever seen for a headline number being entirely misleading. It's really important, obviously, GDP, it always...
It's that first starting point if you're thinking about an economy, right? How's it performing? Okay, well, how big is it? And right, is that growth? Well, sorry, is it growing or is it contracting, right? And at what speed? And that's the very starting point for any economist. It's even the starting point for anybody like a trader, investor who's thinking from a macro perspective.
And so, you know, obviously it's really important. And that minus 0.3 figure, if you're a journalist...
This is like, oh, well, I can jump on that and really sensationalize it. If you're also a journalist, that's maybe anti-Trump. This is perfect fodder to kind of really go after it. So as you said, it is a contraction. The only reason, well, it contracted because of a very kind of nuance. It's just the way GDP is calculated. Did you know what the GDP equation is? Of course I do, Piers. Yeah? Yeah.
You've been talking about GDP, I reckon, for like 20 years. Do you actually know what the mathematical formula is? It's actually pretty simple. I'm going to tell you. I'll throw some letters first. GDP is basically, there's five components to GDP. Firstly, there's three, and it's C, I, and G. C is consumption. That's household consumption. That's us. That's consumers.
spending money all right that's the seat that's the biggest part of gdp especially like i should qualify that for like a westernized or even just a kind of you know mature economy mature rich economy then obviously your consumers are generally relatively speaking wealthy
And therefore they've got some firepower when it comes to spending, right? So quiz question number two, for the United States, because we're talking US here, like what do you think the proportion of, because their GDPs, well, it's knocking on $28 trillion, right, in one year. Now, what do you reckon, what percentage of that is made up by the C part, do you think? That's consumers spending money. What do you reckon? 70%. Yeah, good. 68%.
that's kind of come down a little bit but we'll go into that in a second but right consumption right household consumption i well that's investment as businesses spending money and g is the government spending money right so it's all spend spend spend then you get the other two components to complete the five which is x and m exports and imports but here gdp is
C consumption plus I investment plus G government spending plus X exports minus M imports. So the big thing about this equation is you've got a negative element to it, right? You subtract M.
sorry, imports. Why is this number, we'll go into more detail in a second, why is this number for quarter one of 2025 coming negative at minus 0.3%? It's because the M, the imports part of the equation, has jumped like really sharply. It's like up 4.8%. Okay.
So we'll get into why that's happening. You might be able to guess already. Why might imports have shot higher? Oh, well, maybe it's because people are worried that these imports are going to be a lot more expensive in the months ahead, thanks to good old Donald and his tariffs, right? It might be that. This is the problem with this data. Ultimately, we don't know for sure. But certainly a big contributing factor surely has to be people front-loading
That's businesses buying in inventory. It's businesses buying in components. It's consumers buying stuff in quarter one because they don't want to pay more in quarter two, right? Now, what does this mean for the overall economy? Because it sounds, well, minus 0.3 is contracted. Surely that's bad news. Incorrect. Because what will happen in quarter two
Well, imports will drop. Why? Because people bought a load extra in quarter one. And you can see that the shipping data coming into the port in California, one of the key ports, that's where all the Chinese stuff gets shipped in. We already know that in the second month in May, next week, we got a year-on-year 45% drop.
in goods getting shipped in in second week of May 2025 compared to second week of May in 2024. So we already know imports are going to drop. So if that's the negative element in the equation that we know is going to be a lot lower next quarter, Bloomberg's point, oh, we might be on the brink of recession because we're going to get two quarters in a row of contraction is entirely false. I would bet my entire wealth, I would bet the whole of Amplify
that quarter two- Whoa, whoa, whoa. I'm not signing this off yet. Quarter two will be a nice bumper positive number because it'll rebound. So actually what you've got to do as an economist is don't just take that negative reading. We've got to take next quarter's positive reading, basically net it off and take the average. That's then the true growth, okay? Now what's under, what about all the other components then? Because I said there's C, consumption. There's I, investment. There's G, government. What about those? Well, they were super hot.
They're the important ones. They're really strong. So Bloomberg's idea that this economy is failing is nonsense. Real household consumption was up 1.8%. Really solid. Domestic, oh, sorry, the government spending was up like 3%, for example. Private investment, which is actually businesses, actually jumped 22%.
Now, again, some of that might be the front-loading on tariffs, and that's because I think specifically computer purchases or IT equipment purchases was absolutely through the roof, like crazy, crazy number. And I think actually the computer purchases element on its own singularly was a plus 1% in this kind of overall GDP rate.
It just got trumped by the minus 4.8% from the jump in imports. Can I just step back and also just explain, well, why do we take, why is imports a negative component in this equation? And it's because I got a good analogy and I heard it. It's not mine. I heard it from a podcast I was listening to. And they were basically saying, well, look,
Well, firstly, there's a clue in the name, right? Gross domestic product, right? Domestic. Well, imports, of course, by definition, they're not domestic products. They're products you bought from abroad. But look, if you take a, let's take a car, right? Let's say you've got a car manufacturer in the US. Let's say they built the whole thing in the US apart from the wheels and they just import the wheels, right? Well, in that GDP equation,
You've got to think about it. Well, actually, the business investment, well, that's consumption because that's the company buying all their components to build their vehicle, right? So that gets added in. But then the consumer is going to buy that car. So that gets added in as well, right? But you've got to minus the wheels because the wheels, well, they weren't manufactured here in the US. So you don't want to double count it, basically.
And that kind of money is kind of leaving the country, right? So they take off. It's a nuance in how it's calculated, and it can be misleading when you get a sudden violent jump and volatility in the level of imports. So look, in summary, this GD, what Bloomberg should have reported, they should have reported that consumption growth is holding up really nicely. Okay, now it's not accelerating. I said it was 1.8% up. That's about the same as last quarter.
Just to add on that consumption point as well, is that obviously we had some of the big tech names reporting this week. And what we saw there support that narrative because Alphabet sales beat estimates on Google search advertising. Meta jumped on resilient ad sales. These numbers wouldn't be up if people weren't consuming. Well, and the other point in those tech earnings was their amount of spend.
on AI, right? CapEx for AI. Like, I can't remember exactly. I think Microsoft said they spent like 20, 22 billion, I want to say, in quarter one on CapEx versus 14 billion the year before. So actually, this might be, and I'll go back to that point, we just don't know yet, right? My point there is those imports suddenly jumping. How much of that is...
Yeah, people front-loading because tariffs are coming. Or how much of it is actually just straight-up proper capex increase, as in the big giant tech firms just buying more compute power? So, I mean, it could be
It could be that this is going to be a really positive thing when we get, we just got to wait for next quarter's data, unfortunately. But look, in short, this GDP report, consumption solid, holding up. Why is that important?
Bloomberg jumped all over those sentiment surveys. Why have we been really concerned? And why are we so relieved by this report, despite the headline looking like it's bad? We're relieved because consumer confidence numbers have really dropped sharply. Business sentiment numbers have really dropped sharply. So we're like, well, that ain't good. Surely that's going to feed through in the consumption side and the investment side of this GDP figure. It hasn't.
I mean, you can ask, well, hang on, how does that even make sense? I don't know. But basically, even though consumers, apparently when they get surveyed, are saying, yeah,
Not sure about this Trump thing. I'm a bit uncertain and nervous now. It doesn't matter. They're spending at the same growth rate as they were last quarter. Business investment looks really good. Okay. And that's gone up a little bit in terms of its growth rate. We had some inflation. There's an inflation element to the GDP stuff as well. That dropped not by much and remains above the Fed's target around 2.6%. But generally, it's really solid.
We're relieved because of all those sentiment surveys led us to believe it wouldn't be solid, which then just lastly leads me to point into next week where we've got a Fed meeting. And are they going to cut or not? And I would say off this data, they ain't cutting next week. Yeah, I was going to ask you then. So to conclude, from the Fed's perspective, this data has little meaning in terms of their deliberations? I would, well, no, I would say the opposite.
I think it does have meaning and it shows the Fed that the sentiment surveys aren't feeding through to the hard data. So I would say there's now less chance of a cut next week than there was before this GDP report. Now, the thing about that, right, think about markets are currently pricing. And if you look at the yield curve and look at short-end yields, they're basically pricing for rate cuts this year.
But if the Fed aren't going to cut next week, there's only six meetings left, including next week. So if they don't cut next week, you've got five meetings. Now, are the Fed going to cut in four out of the remaining five meetings? I just can't see it.
Well, yeah. I mean, you say that you've had the tech firms' earnings in general kind of holding up. Also, we're recording this on Friday. This morning, China said it is assessing the possibility of trade talks with the US. So it's the first sign since Trump hiked tariffs last month that negotiations between the two sides can start getting underway. The Chinese Commerce Ministry made a statement a few hours ago from recording that
And that it had noted that a senior U.S. official repeatedly expressing their willingness to talk to Beijing over tariffs, urging officials in Washington to show sincerity towards China. Okay. Yes.
So yeah, the tide is turning again. Well, this maybe sort of dilutes what I was about to say then, because don't forget this GDP report. Yeah, bad on the headline, but actually really solid underneath. Don't forget it's quarter one. All right. So that's January, February, March. We're already into May, right? So we're already not, you know,
a third of the way through quarter two. Now, what happened on the second day of quarter two? Liberation Day, 2nd of April, that's when Trump kind of launched his tariff attack, right? So meaning tariffs haven't gone up in quarter one at all, but the risk of them going up in quarter two has almost certainly contributed to that spike in imports, right?
But what happens in quarter two? Do tariffs go up? Well, they have gone up, but nowhere near as much as was threatened on the 2nd of April, right? Apart from with China, and that news flow possibly seems like there's a pathway to at least discussion starting, which is definitely a positive. But it still remains that what happens in quarter two. Now, there was a really interesting earnings report earlier this week from Visa,
Because look, we want data, right? We want up-to-date data. The problem with economic data, it's often quite old by the time it's been calculated and then released. None more so than GDP. It gets released for the first time one whole month after the quarter has finished. We then get an updated reading in another month's time where they revise it all because there's more data that's come in. And so look, it's super old. Visa is one of those companies that's like right at the coalface of
of that consumption the household consumption bit obviously credit card spending they've got all the data and actually so the visa ceo he was saying we have not seen any signs of overall consumer spending weakening uh and he's talking about in april now so the start of quarter one sorry start of quarter two he's saying april was solid so i get what you're saying
But you said that's the CEO. If you're the CEO of Visa and the world's going through a pretty shaky time, wouldn't you be banging that drum too? I mean, yeah, that's fair. That's fair. What he did say, a bit more interestingly, stripping it down, he said the most affluent part, because obviously that C, consumption, well, who's in there? Well, there's different categories, right? And we look at the income brackets and it's the super rich that contribute an outsized amount
as you'd expect, to that overall C figure, consumption. So you've got to look to signs for any weakening in the top affluent category is a real emergency sign for consumption and GDP, right? But he was saying that actually the most affluent were growing the fastest. He said that, but on top of that, all spend bands, all income bands remain resilient.
and consistent with past quarters. He did say there's been some interesting moves within spending categories. He said that actually travel with airlines and lodging growth was decelerating, but overall discretionary and non-discretionary spend remains strong. That was his kind of message. But look, we still got the tariff uncertainty, but let's see on those China talks. But look,
We had some great earnings. Microsoft shares were up 9%. Meta was up 6%. You go and check out your stock indices. What I actually liked, I'm looking at the NASDAQ chart right now, which is back up about 19,800. It's now recovered all of the Trump Liberation Day sell-off. You remember a few weeks ago, we were talking about this collapse over four days where the S&P dropped 12%. It's recovered it all.
And it's so funny, actually. I'd just love to give a quick shout out to you, the general public. And the reason why is because I was looking, I don't have the numbers to hand, but there was a huge volume influx of retail investors.
I'm not here to say when to buy, how to buy, that you're going to be right because the market can turn. But I think what's fascinating is I met up with a really super senior guy who used to be a head of macro research at a US bulge bracket bank for 25 years. He now works for a pension fund.
and it was really interesting because the pension fund, it was just kind of not showing any names or anything like that. But you can imagine a pension fund, the market starts collapsing and here's a person who's been in a very agile dynamic environment in the bank on the cutting end. We've seen the investment bank earnings, the trading divisions are killing it. It's like record because of the volatility. But
He was saying everyone's just too nervous to make a decision. No one wants to actually commit, even though he was saying there's real value here and these history has shown us. And it's just interesting because the inflow, the retail market over that period that we've just had, the inflows were huge. And these were more, you know, I'm not talking trading. This is more people entering for long-term kind of investment plays. So yeah, shout out.
to the man on the street just showing wall street a little thing or two about how to hold your nerve and when everyone's fearful you know get your buddy warren buffett and then let's go um but just to close quick stats check um because it's donald's 100 days oh yeah and so i found it found a stat for you so let's see how you and our listeners do with this one okay
President Trump averaged more than five posts a day for the first 100 days of his first term. This was back in the day of the Twitter days. Obviously, now he's on Truth Social. So there was some analysis that came out and it was looking at the number of posts on Truth Social.
within his first hundred days. So remember, he was averaging five posts a day the first time. What do you reckon he's been clocking in on these hundred days? Per day, posts on True Social. Well, look, the way you set this up means it has to be higher. So I'm going to go double on average 10. Okay.
Okay, you might need to double up again here. No, really? 17 posts a day, more than 1,700 posts in the first 100 days. What? Yeah, that is... So that's basically, that's half of each day there, just posting. I mean, wow.
Well, as you said, quite rightly, with the Q2, this was Q1 GDP we've talked about, as he tweeted or posted, be patient.
can you do another analysis please can you what what proportion of each tweet is capitalized capital letters oh it's a good question it has changed term one versus term two yeah it's i'd say it's definitely higher this time yeah all right cool well that is it so quick short sharp uh summary of what's been going on and i guess the main takeaway of don't believe everything you read question be curious
Also, have good breadth of reading. You know, it's a super essential skill in life, in your professional domains, when you're making any type of decision, whether that's in investing or anything else. It's always good to get under the skin and understand these things. And then, yeah, hopefully this episode has helped and you'll be better prepared to analyze some other headlines you see in financial media going forward. So Piers, have a great long weekend and same to everyone else. Have a great weekend. See you.
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