The US Economy is on The Cusp of Stagflation
Originally published for Theya — subscribe here. Follow Joe on X.
Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store.
the cliff-notes:
- the advanced GDP data for Q1 was the lowest print in 2 years
- core PCE came in way hotter than expected, mounting stagflation fears
- the Fed is wedged deeper between a rock and a hard place
Abysmal economic data released on Thursday painted a not-so-rosy picture for the US economy. In the last 3 post-pandemic years, nominal growth has been positive while quality of life has deteriorated behind the scenes of officially released data, and the latest data continues the trend.
GDP growth slowed from 3.4% to 1.6%—missing economist expectations by 90 basis points (0.9%). Not bad enough? Core PCE inflation has also accelerated (on a quarterly basis) from 2% to 3.7%. I wouldn't weigh these numbers as gospel, since they are not yearly figures, but the fact remains that nominal growth is sputtering and consumer prices, the most sticky ones, are red hot:
GDP came in 3 standard deviations below the mean estimate, and core PCE came in 2 standard deviations above the mean estimate. Though we're not there yet, since the unemployment rate hasn't spiked yet, the makings of stagflation are shaping up during an election year. No wonder gold has been surging lately. It is up $150 per ounce over the last 30 days as people look to insulate themselves.
One note: this is the advance print for Q1 GDP, and will have more revisions before the final release in a few weeks. It could be revised higher:
GDP growth shrinks in the lead-up to recessions, before flipping negative and making the contraction official. Look at the chart below in the late '90s. We're currently in one of these deceleration phases. This is the lowest print in 2 years:
The core PCE print is more disconcerting since it has dislocated from growth. Prices are supposed to ebb and flow with economic growth, as measured by GDP, in our credit-based world economy.
Price growth is moving in the opposite direction of GDP growth, a killer combination. People aren't quite thrown out of work en masse, but living expenses are rising faster than people can stomach.
The correlation between Core PCE and headline consumer price inflation is clear, and CPI could be headed back above 4% sooner and faster than many believe:
For voters in an election year, this is poison for the incumbent. The last time that the US had true stagflation was during the Jimmy Carter presidency.
Again, the US has not entered true stagflation just yet. The unemployment rate is still fully intact, albeit a little bit elevated, and this is only one data release, not a consistent trend.
This is what the electoral map looked like during Jimmy Carter's re-election bid:
Markets are pricing in hot inflation expectations and high Fed interest rate expectations. The 2-year US Treasury yield, a Fed Funds proxy, and 10s, a growth/inflation proxy, both spiked 8 basis points moments after the data. This only adds to the months-long trend of 2s and 10s both etching higher as the Fed holds interest rates firm but economic activity is still stubbornly elevated:
Another view is this chart of Fed rate expectations for different months. The expectation in January was for the Fed to make 3+ rate cuts by June, that expectation has shrunk to zero cuts. For December, 6+ expected cuts have shrunk to just one and will become zero if data releases continue showcasing positive nominal GDP, however weak it may be, and hot price inflation:
Ultimately, just don't worry about it. We know how every cycle resolves: financial markets reach their breaking point, corporates begin layoffs, equities crater, and the Fed slashes its policy rates. Now that the Fed faces the problem of a US Treasury burdened by $1.5 trillion in annual interest expense by year-end, the certainty of this cycle resolving in cuts is even more crystallized.
If you're on a multi-decade time horizon, as you should be, this is simply the late stage of another economic cycle. One of many that you'll experience in the years to come. Data releases like this one should not matter to you unless you're an algorithmic trader. Chill out, zoom out. Bitcoin has been rangebound for 8 weeks:
Final thought: stay humble and self-custody.
Take it easy,
Joe Consorti
Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.