Here's the Deal with the Economy - February 2, 2025

Economy: In Slowdown

Market Cycle: Bullish

_{Week 5 of 52 for 2024: 9.62% of the way through 2025}

Table of Contents

• Weekly Note:

• DeepSeek AI’s game changing and intriguing week.

• And NEEEEWWWWW US Treasury Secretary… Scott Bessen …

• So far, so good for corporate profit margins.

• Interest Rates remain unchanged at 4.25% - 4.5%.

• 2.3% GDP growth for Q4 2024

• Consumer revolt???

• Frontier taking another shot at acquiring Spirit A …

• Backlash against UPS executives begins to build fo …

• US students continue to fall behind.

• Tariff time???

• Trump implements tariffs on Mexico, Canada, and Ch …

• Significant Economic Data from the week:

Weekly Note:

From DeepSeek narratives to tariffs and the appointment of a new U.S. Treasury Secretary, this past week was packed with economic developments. And this heightened activity of late isn’t likely to fade anytime soon. The economy remains one of the most dominant and dynamic storylines in public discourse at the moment, a trend that will likely persist throughout the year and into next.

That said, an economy making front-page headlines isn’t necessarily a good thing. Historically, a strong and steadily growing economy tends to fly under the radar. It’s predictable, even boring, to most people. But the more economic news dominates the conversation, the worse it usually is for the economy.

With that in mind, let’s break down the past week’s most important developments.

DeepSeek AI’s game changing and intriguing week.

As reported earlier this week, DeepSeek made a huge splash on Sunday night by generating excitement with its bold claims that its new AI model, R1, was significantly cheaper to build and supposedly far more energy efficient than other AI models to date. However, as more details emerged, it became clear that the Chinese company significantly overstated its achievements. On top of that, reports suggest that DeepSeek may have bypassed U.S. sanctions to obtain more advanced chips.

While it is not at all surprising that a Chinese company or economic news out of China was drastically overstated, the extent of this one appears to now be wildly more erroneous than usual.

For instance, while few believed the original claim of R1 only costing DeepSeek $5.6M to build, reports now suggest that price could be as high as $1.3B.

As a recently passed legend would say… “Juuuuuuusssst a bit outside.”

The biggest disappointment lies in the exaggerated energy efficiency claims. If true, those advancements could have benefited not only China but also the global tech industry and energy markets as a whole. Greater efficiency means lower costs, reduced strain on power grids, and a more sustainable future for AI.

Regardless, the development is still a major milestone for the sector. It is also remains a significant threat to the United States’ dominance in AI. Making it a concern to the U.S. economy, and possible threat to national security, even if DeepSeek’s R1 is not as revolutionary as originally reported.

Adding to China’s huge week in the development of AI models was Alibaba who also released their own AI model.

Ultimately, this is the week China put themselves on the map as a major force in the AI sector as both AI models have received positive reviews.

And NEEEEWWWWW US Treasury Secretary… Scott Bessent

If you read that headline as a WWE announcer in your head, it sounds much cooler and more exciting.

Either way, Scott Bessent was officially confirmed and sworn in as the new U.S. Treasury Secretary this week. A role that puts him at the center of economic policy and financial regulation. Markets will be looking for clues as to how he plans on implementing President Donald Trump’s sweeping economic changes in the coming weeks and months.

So far, so good for corporate profit margins.

As of January 24th, profit margins remain strong for the 16% of S&P 500 companies that reported earnings.

This is a positive sign for the economy in the short term. However, keep a close watch on this metric as it’s one of the last major indicators left to weaken and signal a shift in the credit cycle. As we’ve discussed, when profit margins finally contract, it will likely trigger widespread layoffs. This could either mark the beginning of a recession or confirm that one is already underway.

So far, so good. For now…

Interest Rates remain unchanged at 4.25% - 4.5%.

As expected, the Federal Reserve announced this week that interest rates will remain unchanged for the time being. Also unsurprisingly, President Trump lashed out at the decision. Whether it’s just political theater or a genuine misunderstanding of how the economy works is up for debate.

That said, the Fed makes an easy target for those who don’t understand how the economic system works. Monetary policy is complex, and most people don’t have the time or patience to dig into the details. This creates the perfect environment for frauds; people who build careers by branding anything they don’t understand as “corrupt.” A prime example? Those poor wretched souls known as housing doomers, who have been predicting another housing price collapse every year for twelve years now while housing prices did the exact opposite of their predictions. Unsurprising to anyone who took the time to do the work and knows how to accurately interpret data and trends.

To be clear, legitimate criticism exists for everything as nothing is perfect because everything comes with trade-offs. But many of these doomsday narratives stem from an emotional need to oversimplify the world into black-and-white terms, rather than engage with the nuance that reality demands.

Looking ahead, unless the economy or markets take a sudden downturn or a significant surge in inflation occurs in the next couple of months, expect the Fed to hold rates steady at their next meeting on March 19th, and likely again on May 7th.

Especially as PCE this past week joined the other two measures of inflation, CPI and PPI, in trending back up monthly while remaining above their 2% targets.

2.3% GDP growth for Q4 2024

According to the initial GDP report for Q4 2024, the economy grew by 2.3% from the previous quarter. This was softer than the 2.7% growth rate expected. Not great or terrible news, but something to keep an eye on as the economy navigates the backside of the current credit cycle.

Consumer revolt???

As reported by the Wall St. Journal this week, there is a growing subset of consumers participating in “No-buy 2025”. For an economy which is now propped up by consumer spending, the more this catches on throughout the year, the more it will negatively impact the economy.

However, I take solace in the fact that this seems to be a good thing as it could signal a wising collective consumer. Those partaking in the “no-buy 2025” now will more than likely have more cash to spend when the deals are plentiful in the next year or so, due to a weakened economy or one in recession. The more people that learn when it is best to spend and take speculative shots with investments and when it is best to spend conservatively and sit on cash, the better it is for the overall health of the economy in the long run.

Frontier taking another shot at acquiring Spirit Airlines

Frontier Airlines is once again attempting to strike a deal with Spirit Airlines, reviving a merger that previously fell apart due in large part to the former administrations imprudent stance on mergers and acquisitions. The move suggests that Frontier still sees value in combining forces to create a stronger budget airline capable of competing more effectively against larger carriers. A successful merger could lead to a larger network, lower operational costs, and potentially more competitive pricing for travelers.

While Spirit Airlines, which is currently going through bankruptcy, may be saying “no” to the new offer now, it may turn out to be best for their investors, employees, and customers in the long run.

Backlash against UPS executives begins to build for their continued lack of performance compared to its peers.

UPS reported yet another lackluster quarter this week while also offering a disappointing forecast.

This reinforces what Here’s the Deal has pointed out in the past, UPS’s core issue is management. To the point that longtime investors and former employees with deep ties to the company are now voicing concerns, making it clear that leadership missteps are at the heart of UPS’s struggles. Operational inefficiencies, strategic misfires, and possibly poor decision-making at the top are starting to show in ways that even the broader market can’t ignore as it continues to woefully under-perform its competitors. During that time UPS executives were erroneously blaming the economy for its lackluster performance the past few years while their competitors continued to perform well in the same economic conditions.

US students continue to fall behind.

We learned this week that US students continue to fall behind with the new release of reading test scores. The longer this continues, the bigger the threat it is to the US economy and national security in the years ahead.

It’s hard to find a credible reason for this with the plethora of high quality teaching and learning materials at our finger tips. While it’s easy to blame those very tools at our finger tips for the drops in performance, that’s like blaming a hammer for being a crummy power saw.

Tariff time???

On Friday morning Reuters reported that the scheduled tariffs set to be administered to Canada and Mexico on February 1st were pushed back to March 1st. Then the White House denied the Reuters report about an hour later, stating the deadline was never changed and was still February 1st. As if this writing, the tariff rates stand at 25% for Canada and Mexico and 10% for China and are set to begin Feb 1.

Former Canadian Finance Minister Chrystia Freeland seems to have read last weeks Here’s the Deal as she echoed the idea that tariffs on Canada and Mexico serve as a warning shot to China. Either she’s a reader, or this is just more proof that your favorite economic writer knows exactly what he’s talking about. I’ll let you decide, but you only get those two choices, because I made the rule. 😃

Meanwhile, the auto industry continues to scramble in preparing for the impact of tariffs. If the tariffs are levied, expect significantly higher prices on cars and car parts along with gas and oil, food, pharmaceuticals, and home-building components to name a few. Unless of course you think that companies which are currently focused on protecting their profit margins are simply going to eat the additional costs and drive those margins down.

Not exactly the best bet in the world to make.

That said, there’s still a chance for a different outcome, as Trump’s advisers are reportedly considering alternatives. However, it’s President Trump’s decision ultimately, so we’ll see what happens.

Trump implements tariffs on Mexico, Canada, and China.

And of course, right as I finish proofing this post yesterday afternoon, Trump pulls the trigger implementing tariffs of 25% on Mexico and Canada as well as 10% on China.

As expected, Canada and Mexico wasted no time firing their own tariffs right back at US consumers. Banding together to make this new tariff war hit the US consumer and economy as much as possible, as the result of these new US tariffs levied on them will more than likely send their countries into recession.

Significant Economic Data from the week:

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