Charts and Smarts^®

US GDP Growth Revisions vs 10Y Real Yield (12/30/22–6/6/25)

Break Away: The asset with the more head-scratching performance over the past few months is undoubtedly US Treasuries. While there are myriad narratives as to why rates have remained stubbornly high, price action in Treasuries feels eerily similar to the painful sell-offs of late 2023 and 2024, when the narrative broke down and technicals took full control. But those technicals can dominate the price action for only so long. Nominal growth tends to drive nominal yields, and there’s nothing like a whiff of slowing growth to bury the narratives and spur a strong bid into Treasuries.

2025 Reconciliation Bill: Deficit Impact vs Fiscal Impulse

Deficit Impact With Tariffs (Current Law)

Fiscal Impulse Impact With Tariffs

Do It Again: With the Liberation Day shock fading, markets have begun to shift their attention to the reconciliation bill making its way through the houses of Congress. While the Trump administration may be touting it as one big, beautiful bill, the details look neither big nor beautiful. The vast majority of the deficit spending in the bill is simply an extension of the existing tax policy as opposed to incremental fiscal impulse. The budget scoring and positive growth implications of the package indicate a modest and short-lived fiscal impulse. Don’t expect much from government spending.

Distributional Effects of 2025 Reconciliation Bill

Shut Down: It’s not just the simple deficit changes that point to a limited fiscal impulse, but it's the details as well. Tax cuts, the centerpiece of the reconciliation bill, are regressive in nature, disproportionately benefiting higher-income earners with a far smaller impact down the income spectrum. But perhaps the greater issue is the regressive nature of the spending cut pay-fors in addition to tariffs, both of which weigh on lower-income consumers far more than their higher-earning counterparts. All told, the multiplier effect of the proposed legislation in conjunction with tariffs suggests an extremely limited positive growth impulse.

Contributions to Personal Income Growth (1/31/24–4/30/25)

Good Timin’: For all the focus on trade and fiscal policies, the focal point for our calls hinge on the labor market. Income fuels consumption, and while personal income growth has been robust to begin the year, it’s been distorted by a series of one-off transfer payments. While these are indeed helpful sources of incremental spending power, filtering out the noise and focusing on wage and salary disbursements tell a very different story. Wage growth continues to cool, suggesting that consumption looks likely to converge down to softer income growth as labor slack continues to build.