Markets Buy into Trump's 15-Point Plan -- Iran Does Not
As Trump Dishes Out Carrots, Iran Serves More Drone and Missile Attacks
Key Takeaways
Wider War Risks Persist Despite Peace Push: The White House has sent Iran a 15-point peace plan, delivered by Pakistan, but so far all the regime has responded with is more attacks on Israel and the rest of the Gulf region (though the Iranian army is claiming the U.S. has suffered a “strategic defeat” and the IRGC just selected a hardliner, Mohammad Bagher Zolghadr, as its new leader). All the while, Saudi Arabia and the UAE are reportedly making plans to join in the war effort, and more than 4,000 American troops are on their way to the region (and weighing the option of deployment of a combat brigade from the 82nd Airborne Division).
GDP Revisions Turn South: Don’t look now, but GDP growth revisions are squarely to the downside, as the effects of the war bite into those stepped-up income tax revisions. And even with the negative effects of the government shutdown being reversed (mostly), the Atlanta Fed Nowcast model is down to +2.0% annualized growth for Q1, down from +3.2% just three weeks ago. Real final sales have been shaved to +1.9% from +2.4%. This is what the Fed should also be focused on: the demand-contraction effects on core inflation. Not just the static effects of higher fuel and food prices coming our way.
Growth Leans on Productivity as AI Effects Build: Nonfarm business productivity growth in Q4 was marked down to a +1.8% annual rate from +2.8%, which was no surprise given the sharp downward revision to GDP growth for the quarter. Still, what it means is that over 100% of the growth in output in Q4 came from productivity alone (real business output growth was only +1.5% annualized, as it turns out). Over the past three years, 80% of the growth in the economy came via accelerating productivity. The norm back to 1950 is an even split: an equal contribution from both labor input and productivity. Now it is four parts productivity to one part labor input growth. For those who don’t think the AI explosion isn’t already having an impact on the jobs market, think again.
