Update 840 — Week of Chaos, Confusion;
GDP Growth Slows in 4th Quarter 2024
The country was plunged this week into a frenzy of chaos and confusion amid the Trump administration’s on-again, off-again freeze on federal grants and loans spending. The broad and vague memo released by the OMB Monday was rescinded on Wednesday but the attempted impoundment and the prospect of similar efforts left states, beneficiaries, and progressive advocates bracing for trouble ahead.
New economic data released this week shows the U.S. economy slowed but remained strong in the fourth quarter of last year and the Fed’s preferred inflation gauge ticked up to 2.6 percent last month. Markets and the AI industry were shocked Monday by the release of DeepSeek, a low-cost Chinese product. Meanwhile, cabinet confirmation votes and hearings continued on the Hill. We detail the foregoing below.
Good weekends all…
Best,
Dana
Headline
Administration’s Unconstitutional Funding Freeze
As we outlined in Wednesday’s update, the Trump administration lurched the country into mayhem Monday night after issuing a pause on all federal grants and loans. The OMB memo (M-35-15) communicating the freeze was ultimately rescinded on Wednesday after a broad uproar, but its effects continue to percolate through Congress, agencies, states, and programs that serve millions of Americans across the country.
In the midst of mass outcry from states, lawmakers and their constituents, and advocates, OMB issued a “clarifying” FAQ memo Tuesday stating that the freeze would not apply to direct benefits to individuals but only to a set of previous executive orders issued by the Trump administration (outlined below), something mentioned in the original memo but paired with language like “Federal agencies must temporarily pause all activities related to obligation or disbursement of all Federal financial assistance.” Following the ultimate rescission of the memo, White House Press Secretary Karoline Leavitt, in a post on X, stated: “This is NOT a rescission of the federal funding freeze. It is simply a rescission of the OMB memo” – a clear attempt to distance the administration from the fallout from the original funding freeze memo without walking back stances communicated in previous executive orders.
Because the funding freezes included in these EOs appear still to be in effect, we outline how they purport to impact funding priorities below:
- Protecting the American People Against Invasion – Orders the Attorney General and Secretary of Homeland Security to pause the distribution of “Federal funding to non-governmental organizations supporting or providing services, either directly or indirectly, to removable or illegal aliens.”
- Reevaluating and Realigning United States Foreign Aid – Orders a “90-day pause in United States foreign development assistance.”
- Putting America First in International Environmental Agreements – Orders the “withdrawal from any agreement, pact, accord, or similar commitment made under the United Nations Framework Convention on Climate Change.”
- Unleashing American Energy – Order agencies to “suspend, revise, or rescind all agency actions… that impose an undue burden on the identification, development, or use of domestic energy resources.”
- Ending Radical and Wasteful Government DEI Programs and Preferencing – Orders “the termination of all discriminatory programs, including illegal DEI and “diversity, equity, inclusion, and accessibility” (DEIA) mandates, policies, programs, preferences, and activities in the Federal Government”
- Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government – Orders agencies to “end the Federal funding of gender ideology.”
- Enforcing the Hyde Amendment – Orders the end of the “use of Federal taxpayer dollars to fund or promote elective abortion”
The funding implications of the EOs listed above, as well as the blatantly unconstitutional attempts by the administration to circumvent Congress’ power of the purse, were not forgotten by members of Congress following the rescission of the memo.
Yesterday, Senate Budget Committee Democrats united to boycott the committee vote for Trump’s OMB nominee Russell Vought – a strong advocate for impoundment who many believe was the architect of Trump’s efforts to freeze federal funding. Vought’s confirmation still moved through the Senate budget in an 11-0 vote despite concerns voiced by Republicans this week, including by Senate Budget Chairman Lindsay Graham (R-SC) himself. The prospects for Vought’s confirmation remain unclear, however, Senators who vote in his favor will surely go on the record for their role in encouraging an unconstitutional overreach of power by the executive, ultimately endangering critical federal funding that provides a lifeline for millions of their constituents.
Other Developments
Confirmation Votes and Hearings
Scott Bessent, Treasury Secretary
This Monday, the Senate confirmed Scott Bessent – Trump’s nominee for Secretary of the Treasury Department – in a 68-29 vote. Support for Bessent crossed party lines, with 14 Democrats and Angus King (I-ME), an independent that caucuses with the Democrats, voting in favor of the nominee.
Bessent will now take over the topmost position in the Trump administration on economic and fiscal policy. As we covered in a previous update, Bessent will act as an agent of the Trump administration, advising on and implementing its problematic agendas on tax policy, trade policy, and deregulation of the banking sector.
Howard Lutnick, Commerce Secretary
On Wednesday, businessman and billionaire Howard Lutnick testified before the Senate Commerce, Science, and Transportation Committee to field questions in his Commerce Secretary nomination hearing. The Commerce Department oversees a wide range of programs from the National Telecommunications and Information Administration (NTIA) and the National Oceanic and Atmospheric Administration (NOAA) to AI regulation, export controls and trade and tariff policy.
Lutnick would play a leading role in implementing his trade policy – which is taking center stage tomorrow, February 1, as President Trump continues to threaten tariffs on Mexico and Canada. The tariff announcement expected over the weekend is part of what Lutnick considers to be a short term “action-oriented model” with domestic policy objectives – in this case being tied to border security demands. He distinguishes these actions from larger scale tariffs with the Commerce Department – along with the USTR – now ordered to conduct a review of various trade policies which could lead to recommending a “global supplemental tariff,” expected by April. While Lutnick conveyed his belief that tariffs on China should be the highest, he offered no reassurances to America’s closest allies – specifically the European Union – saying the United States is “treated horribly by the global trading environment.”
Lutnick expressed his preference for across-the-board tariffs instead of product-specific tariffs, claiming they are more effective. When pushed by Democratic Senators on the widely-shared concerns about rising prices following such broad-reaching tariffs, Lutnick responded: “I can commit that the economy of the United States of America will be much, much better. Particular products’ prices may go up but … this is not inflationary. The two top countries with tariffs, India and China, have the most tariffs and no inflation. It is just nonsense that tariffs cause inflation.” In reality, the costs of tariffs would largely be passed on to American consumers.
He was also questioned on the concerning comments from Trump signaling interest in rescinding some investments from the CHIPS Act. in response to which Lutnick referred to the legislation as an “excellent down payment” but will need to study and review future commitments – not quite the reassuring answer concerned Democratic lawmakers were hoping for.
Kelly Loeffler, SBA Administrator
In one of the less controversial confirmation Cabinet nominations, the Senate Small Business and Entrepreneurship Committee on Wednesday held a hearing for former US Senator Kelly Loeffler, Trump’s nominee to serve as head of the Small Business Administration (SBA). The SBA’s main purpose is to strengthen the economy by providing support for small businesses, most notably by providing access to loans and financial assistance.
Loeffler promised to fulfill Republican policy goals such as cutting red tape and ending work-from-home policies, much to the delight of her former GOP colleagues. Democrats used the occasion to push Loeffler on whether she would carry out “illegal and unconstitutional” orders from the White House, in light of Trump’s EO attempting to freeze federal funding. Loeffler replied, “The president is not going to ask me to do that, and I will not uphold a hypothetical situation here.” Either way, Loeffler is not a terribly contentious nominee, and barring any unforeseen circumstances will likely be confirmed for the SBA.
U.S. Economy Grows by 2.3% in Fourth Quarter
The United States economy grew by a healthy 2.3 percent on an annualized basis in the fourth quarter of last year according to the advanced estimate released by the Bureau of Economic Analysis yesterday morning. Growth in the third quarter came in lower than the expected 2.5 percent and below the 3.1 percent annualized growth in GDP over the third quarter of last year. Overall, the economy grew by 2.8 percent last year, down slightly from the 2.9 percent growth in GDP in 2023.
Source: U.S. Bureau of Economic Analysis
The increase in real GDP over October, November, and December reflects increases in consumer spending and government spending. The increase in consumer spending over the previous three months reflected an increase in spending on both goods and services. The increase in government spending reflected an increase in federal, state, and local government spending. These were partly offset by a decrease in investment. Meanwhile, imports, which are a subtraction in the calculation of GDP, decreased.
While GDP growth slowed in the third quarter, it was strong over the entire year, showing the continued resilience of the American economy amid the high interest rate environment. The second estimate of GDP for the third quarter, based on more complete data, will be released on February 27.
Core Inflation Unchanged at 2.8% in December
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, ticked up 2.6 percent on an annualized basis in December according to the December PCE report released this morning, up slightly from the 2.4 percent annualized increase in prices in November, the 2.3 percent annualized increase in prices in October, and the 2.1 percent annualized increase in prices in September. On a monthly basis, headline PCE rose 0.3 percent last month, the largest monthly increase in prices since last April.
Although headline inflation has been steadily ticking up over the past few months, core PCE – which strips out food and energy prices – may be more reflective of inflation’s underlying trend. Core PCE rose 0.2 percent on a monthly basis and 2.8 percent on an annualized basis in December, remaining relatively stable over the last few months. Core PCE has increased by 2.7 to 2.8 percent over each of the five months prior to December.
Source: Heather Long
The overall 0.3 percent increase in prices last month came as food prices increased by 0.2 percent on a monthly basis and energy prices increased by 2.7 percent on a monthly basis.
The new data show that inflation has slowed significantly since mid-2022, but core inflation remains sticky above the Federal Reserve’s longstanding target of two percent. The pricing trend is in line with stickiness seen over recent months as core inflation has remained high on an annualized basis, close to the low readings of late last year, even as housing inflation has begun to fall. The new inflation data is likely to incline the Fed’s rate-setting committee, the Federal Open Market Committee (FOMC), to hold interest rates steady at its next meeting in March.
DeepSeek Announcement Causes AI Shockwaves
On Monday, the Chinese AI startup DeepSeek made an announcement that sent shockwaves through the global tech industry, causing stocks for companies such as NVIDIA (which saw a record one-day loss) to plummet across the tech sector. DeepSeek has apparently created an AI model, DeepSeek-V3, that is as nearly as powerful as those created by OpenAI or Google with a supercomputer using only 2,000 advanced computer chips, whereas the leading chatbots typically use 16,000 or more of these expensive chips. America’s presumed position at the head of the AI race was turned on its head overnight. The assumption that only major tech companies could afford to compete in the industry is now seriously in doubt. While US models such as OpenAI’s o3 program, which is still in development, seem to still be more capable, DeepSeek has shown that it is not a given that the US will win the global AI race. Nvidia, America’s leading chip manufacturer, took a severe beating on Monday with a $589 billion reduction in its market cap, though it regained much of its value later in the week.
The question arises as to how the US should proceed with AI development policy. Where previous proposals to regulate AI sought to balance innovation with the need for caution, it is possible that Congress will now want to go lighter on regulation to ensure America wins the AI race and maintains its place as a leader in global technological innovation. At the same time, how exactly private investment should be made in AI projects to best boost America’s innovation is now an open question. Companies such as OpenAI invested tens of billions of dollars into “foundation models” that power many different applications, which no longer seems like a sound investment if competitors can easily copy them and run them much cheaper. Whatever happens, if DeepSeek really has created an AI model as groundbreaking as it claims – and there are some experts who are skeptical – then it throws a massive curveball at an industry evolving at a rapid pace.
Look Ahead
Wednesday, February 5
- House Financial Services Committee hearing: Make Community Banking Great Again
- Senate Banking, Housing, and Urban Affairs hearing: Investigating the Real Impacts of Debanking in America
Friday, February 7
- January jobs report