The GDP equation

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On the program today, the bond market story you didn't know you needed. Trust me on this one.
From American Public Media, this is Marketplace. In Los Angeles, I'm Kyle Rizdahl.
It is Wednesday, today, the 26th of February. Good as always to have you along, everybody.
The European Union, should you be curious, has as a single economic entity, a single market, if you will, give or take 450 million people in it. Its collective gross domestic product is about $21 trillion, which makes it the world's second biggest economy behind us.
I mention all of that because the transatlantic relationship just ain't what it used to be. The second Trump administration is turning the United States firmly away from Europe, politically and inevitably economically.
And that, as Axios chief economic correspondent Neil Erwin wrote the other day, is going to come with some costs. Neil, it's good to have you back on the program.
Thanks for having me, Kai. Give us the status quo, aren't they, if you will, of the EU-United States relationship as of like 20th of January, just to pick a date.
Well, it was pretty solid. It was kind of the deepest, most intertwined economic relationship in the world in some ways.
Huge cross-border investments, trade flows, financial flows, flows of people, of ideas, of information. And really, that has made both sides of the Atlantic wealthier over the years.
That is the status quo as of about a month ago. As we turn now, the United States does, to developing a relationship with Russia, as the White House has said it wants to do.

Can the Russians replace the economic gains the United States has gotten from its relationship with the European Union?

No, I think it's worthwhile to think about just the scale here.

Russia is a comparatively small country in terms of its economy, even its population, to the rest of Europe. You know, Russia has a smaller economy than the UK, Germany, France, and Italy individually, let alone put together.
In terms of trade flows, there's not this track record of big, innovative Russian companies, you know, building massive factories abroad in the U.S. or anywhere else.
These are just different scales of economic enterprise. And that's before you get to the kind of diplomatic, cultural, longstanding historical tensions between these countries.
Just as a note on the whole longstanding thing, I mean, the United States has been building its economic relationship with Europe at large since, like, the Marshall Plan. Yeah, I mean, you go back to World War I, World War II, the U.S.
ultimately intervened in both and got involved. And then post-World War II has spent the last 70 years, you know, playing a key role kind of rebuilding Western Europe and making it an economic power.
Now, the European economy, to be clear, has a lot of problems and it's not as innovative and as fast growing as I think a lot of people would like to see it be. At the same time, you know, what you have right now is a very large, wealthy continent that has these deep ties with the U.S.
that are nothing to shake a stick at. You know, you talk about, you look around the U.S., you see all these states where European companies are big employers.
You have BMW and Volkswagen and Airbus and Siemens doing these, you know, operating these big operations in the U.S. These are the kinds of economic interconnections that are hard to replicate with a much smaller and more remote economy.
Take the next step on those interconnections because there's a national security aspect to economic interdependence. Absolutely.
And, you know, part of the entire theory of post-war, you know, U.S.-Europe diplomacy has been that we have an economic interconnection that and a diplomatic geostrategic interconnection that are interrelated. NATO is one side of the coin, economic ties the other side of the coin.
And really both sides of that coin are tarnished right now and really not what they were. And that's happened very rapidly.
I mean, certainly first term Trump had deep skepticism of Europe and hostility toward NATO in certain ways, but he was also not in position to really unwind those ties in the ways that he has made real progress toward doing in just the first five weeks of this administration. And we saw that over the last few weeks with J.D.
Vance over in Munich. We saw it with, you know, the German elections where, you know, the new German chancellor, incoming German chancellor is basically saying we must be independent from the United States.
Those are words even a month ago you would not have expected to hear from a new German chancellor. A word here about the rest of the world.
There's a great quote in this piece that you wrote from Hank Paulson, the former secretary of the Treasury, about China and what Chinese officials would tell him. Yeah.
So Hank Paulson, the former Treasury secretary, has said that a Chinese official once told him, well, you, the U.S., have all the good allies. And what they meant by that was, Western Europe, you know, you have Germany, you have the U.K., you have France, you have Japan.
That's part of why China has had to form these relationships with Russia, with North Korea, with kind of lesser powers, lesser, you know, economic forces. And, you know, what's happening right now is kind of the disillusion of that bond between the U.S.
and some of its historically closest allies that also happen to be some of the richest and most populous nations on earth. So, you know, where that leads, we don't know.
How much of its rhetoric, how much of its kind of bluster and how much becomes a real disillusion of these economic and other ties, that's what we don't know yet. But directionally, we know what way it's going.
Neil Irwin, he's chief economic correspondent at Axios. Neil, thanks a bunch.
Good to talk to you. Thanks so much, Kai.

Wall Street today. So look, I'll tell you what, let's have a look at European

indexes. Why don't we, given the conversation Neil and I just had.
Over the past month,

the Dow Industrials are down almost 3%. London's FTSE and the CAC 40 in Paris,

up about 3% apiece. The DAX in Germany up 7%.

We'll have the details when we do the numbers. We strive here at Marketplace not just to keep you abreast of business and economic news, but ahead of it.
Thus, we turn now to the updated read on fourth quarter gross domestic product that we're going to get tomorrow. GDP, of course, the sum and total of economic activity, which last we heard had the American economy growing at an annualized rate of 2.3%.
Consumers, obviously, responsible for most of that. But you know what else spends money? The government spends money.
And government

spending, as perhaps you've heard, has fallen out of official favor. Marketplace's Justin Ho has more now on what could happen to economic growth when the government cuts spending.
Economists use a pretty simple formula to calculate GDP, says Ann Villamil, an economics professor at the University of Iowa. It is represented by C plus I plus G plus NX.
C is consumer spending. That's most of it.
I is investment. NX is net exports, otherwise known as the balance of trade.
And G is government spending, specifically discretionary government spending. The military, they buy airplanes and ammunition, infrastructure projects, roads, airports, things like that, housing assistance, general science space.
This kind of spending at the federal level amounts to about 6% of GDP. Ernie Tedeschi, director of economics at Yale University's Budget Lab, says imagine you were to cut discretionary spending in half over the next year.
That would mechanically reduce GDP by 3%. That's a substantial reduction in GDP growth.
To be clear, Tedeschi says cuts of that size are extremely unlikely. It's not even clear the Trump administration can even find that much discretionary spending to cut.
But Tedeschi says any cuts have effects on economic growth that reverberate over time. You lose out on the gains not just in year one, but in every year subsequently because you didn't invest as much to begin with.
Government spending cuts also have knock-on effects in other parts of the economy. Guy Labas, chief fixed income strategist at Jannie Montgomery Scott, says they could also affect the I component of GDP, investment.
That's because government spending can ensure that there's demand for what private companies sell. And then you can take more risks in expanding and growing and investing in the real economy.
Labas says cuts to government spending also affect the biggest component of GDP, C, consumer spending.

If the government lays off a lot of workers, for instance. That's reduced spending power

in the U.S. economy.
And that means the individuals and businesses that serve those employees have

reduced capacity. They might even institute some layoffs as a result.

Labas says that's why even small cuts to government spending can spiral.

I'm Justin Ho for Marketplace. as a result.
LeBas says that's why even small cuts to government spending can spiral.

I'm Justin Ho for Marketplace. There's a lot of uncertainty in this economy right now.
All you have to do is look around. Tariffs, inflation, whatever's happening with how the government manages this economy.
It's a lot. And that uncertainty shows up in all kinds of ways.
For us today, it's the bond market, safe haven of choice for

investors the world over. The U.S.
Treasury market has been thought of for decades now as a steady, predictable, no-must-no-fuss kind of place for people to put their money. But that is starting to change a little bit.
So we sent Stacey Vanek-Smith to get the scoop. It is 17 degrees in New York.
And the wind is soul crushing. So the place I'm dragging economist Alison Schrager is a little bit unusual.
So how do you feel about getting ice cream in February? As I said, I'm not sure this would be my first choice. Luckily, Schrager follows the bond market at the Manhattan Institute.
And the particular ice cream shop we're visiting has a lot in common with the Bond Market right now. For real.
Oh, here we are. Surprise Scoop.
Surprise Scoop bills itself as the world's first ice cream roulette shop. It's an empty room with white walls and a purple floor and nobody greeting you.

Just some very loud music and some very big touchscreens on the wall.

Okay, do you want me to read this?

Yes, please.

Okay, welcome to Surprise Scoop.

All flavors are randomly selected.

No flavor choosing allowed.

No refunds or exchanges.

Here at Surprise Scoop, you order a scoop of ice cream on the touchscreen.

You pay $10,

and a worker you never see picks your flavor.

The customer has no say at all.

I read that one of the flavors is pickle.

And if you hate what you get, you are in a pickle, according to the disclaimer.

Oh, you have to consent. What if I don't get the ice cream flavor I want?

Sorry, please try again. In all seriousness, we're all taking a risk here.
Risk. Now, here's where ice cream roulette brings us back to the bond market.
So bonds are just little loans you give the government. You buy a bond for four weeks or two years or 10 years.
And when that time is up, the government pays you back plus a set amount of interest. So buying a bond is a lot like how you would usually go for ice cream.
You pick your flavor, you pay, you enjoy a nice, predictable payoff. U.S.
government debt is by far the safest investment one can make in a portfolio. Mike Kudsel is a portfolio manager at PIMCO, one of the biggest investment firms in the world.
He says that safety is exactly why investors and governments snap up billions in U.S. government bonds every week.
In the world of investing, we think the U.S. government is as risk-free as it gets.
But the bond market has been on a slightly rockier road lately, says Alison Traeger. And that's partially because inflation is back?

Inflation.

So say you buy a two-year government bond for $100.

And at the end of that time, the government will pay you back your $100 plus $5 of interest.

But let's say during those two years, inflation spikes.

By the time you cash out, your $105 can't buy as much. Essentially, you lost money on your bond investment.
102 for Stacey. Back at Surprise Scoop, our order is up.
There's a little secret opening in the wall and a hand suddenly pokes out of it, holding our dish of mystery ice cream. The ice cream is white and covered in sprinkles.
So enough of this Bond talk. It is time to dig in.
I'm not sure what flavor it is. It's something exotic.
Is it coconut? It's like durian or something. I have no idea what this flavor is.
I don't think I like it. It's weird.
Weird. Not the experience one hopes for when going for ice cream or buying a bond.
But with inflation worries, there is a rising risk that the trusty, plain vanilla return investors count on with bonds will end up being more of a coconut durian mystery flavor situation. So for the past couple of years to attract investors, the government has been having to pay a higher interest rate or yield on its bonds.
And those rates have gotten pretty high, says PIMCO's Mike Kudsel. Just looking at the bond market, it's definitely more excitement than there has been in a very long time.
Those are very attractive returns with a lot less risk than other markets. So where our $100 bond was paying out $105 after two years, now the government is having to pay out more, say $110.
A sweet deal for investors, but a bitter pill for the government. It's having to pay those higher interest rates, says Schrager.
It's a very big deal. We're running up a lot of debt and debt service payments are becoming an increasingly large part of our budget.
So if they go up even more, it just eats into the budget. We have less money for other things.
Recently, the government has gotten a break. Bond market roulette has struck again.
Right now, investors are worried that tariffs and other economic forces could slow the U.S. economy.
The result? They have been flocking to bonds. And higher demand means the government can pay lower interest rates on those bonds.
Because in spite of all the worries about inflation, bonds are still seen as the safest investment on Earth. In tough times, stocks or crypto can lose a lot of their value overnight.
But with U.S. bonds, the only real worry is that by the time you get your money back, it won't be worth quite as much, which isn't the worst thing.

Kind of like getting an ice cream flavor you don't love. I mean, I'm still eating it.
Me too.

I mean, at the end of the day, even if it's like not the best ice cream, it's still ice cream.

Yeah. Financial risk, just like ice cream roulette, is always relative.

In New York, I'm Stacey Vanek-Smith for Marketplace.

Love, Stacey, though I do.

Not great ice cream is not great ice cream.

Don't eat it if you don't eat it.

But if you need something from us and you miss it on the radio, we've got a podcast.

Check it out, marketplace.org or the platform of your choice.

Follow us there.

coming up Coming up. People like to sometimes touch and see the things that they're buying.
Can't squeeze an avocado on Instacart is all I am saying. First, though, let's do the numbers.
Dow Industrial's down 188 today, four-tenths percent, 43,433. The Nasdaq added 48 points, about a quarter percent, 19,075.
The S&P 500 basically flat 59 and 56. Market's eyes have been focused on NVIDIA.
We told you that earlier this week, which beat analysts' expectations when it reported earnings after the market closed. Today, during the session, NVIDIA up 3.7%, up another 2% after hours.
Broadcom up about 5.1%. Intel lifted 2.3%.
Bitcoin today, about $85,000 per, down from its high of 107. Told you that, so I can tell you this.
Coinbase Global, trading exchange for crypto, up 0.2% today. PayPal, which does allow users to buy and store cryptocurrencies, down 2.7%.
Bonds up yield on the 10-year T-note, farther down 4.25%. You're listening to Marketplace.
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Full disclosures at public.com slash disclosures. This is Marketplace.
I'm Kai Rizdahl. President Trump held his first official cabinet meeting today, during which, among many other things, he confirmed that Volodymyr Zelensky is going to visit the White House on Friday to sign that big minerals deal that's been in the news the past couple of weeks.
Specifically, and this is according to the Ukrainians, that in exchange for American help in getting security guarantees from third countries, Kiev would give the United States 50 percent of the proceeds from Ukrainian state-owned mineral sales.

That is the proceeds, but not the New York Times reports the minerals of themselves. Rare Earths in particular, critical, as you've heard, to all kinds of cutting edge technologies.
As Marketplace's Sabri Beneshul reports, the U.S. private sector and the federal government have been working to develop an independent supply chain for those minerals.
Rare Earth elements have names like gadolinium and lutetium,

and they're in the part of the periodic table where things get weird. They have special electric and magnetic properties.
Ernest Scheider is reporter for Reuters and author of the book The War Below. And two of them, two of those 17, are called neodymium and praesodymium, and they're used to make magnets.
The strongest permanent magnets on Earth. Two coffee mug-sized magnets like these could crush the bones of your hand in the blink of an eye.
And they are critical to the U.S.'s economic future. The thing that makes our cell phones vibrate.
The thing that makes an electric vehicle move is a rare earth magnet. China produces 90% of the world's refined rare earths.
China is the big dog. They are going to be the big dog for many, many years.
Curtis Moore is a senior vice president at Energy Fuels, a major uranium producer in the U.S. They have invested heavily.
There's a lot of government support for their rare earth industry. This has presented a problem for the U.S., says Scheider.
China has been using its ability in this space as an economic weapon. It's restricted the supply of critical minerals before, and it's considering doing so again.
So the U.S. has been trying to get its own rare earth supply chain off the ground.
We are really on the verge at MP Materials of restoring the full rare earth supply chain in the United States. Matt Sloster is head of corporate affairs at MP Materials, which owns the Mountain Pass Rare Earth Mine in California.
It's the largest mine focused on rare earths in the world. So now we can extract the material, we can process the material, and then we can refine it into a usable form factor.
MP Materials has also built a magnet manufacturing facility in Texas. Energy Fuels, the uranium miner, has also begun refining a growing list of rare earths.
But once the U.S. has passed the technical challenge, there's the economic one.
China produces very cheaply, but U.S. costs have gone up.
Chris Berry is president of House Mountain Partners. Because of inflation throughout the economy, the cost of capital of these domestic mining and metals projects has risen rather dramatically, upwards of 30 percent.
Finally, Berry says tariffs have thrown in an element not on the periodic table, the element of uncertainty. In New York, I'm Sabri Beneshore for Marketplace.

One more item from that cabinet meeting that's in our wheelhouse. The president was asked about tariffs on Canada and Mexico, which he said two days ago would start next week,

March the 4th. Today, he said, and here I quote, April 2nd for everything.
Stay tuned. A whole lot of things changed in this economy in early 2020.
The labor market, supply chains, grocery shopping, too, when so many of us started ordering online to get things delivered right to our doorstep. Instacart was in a perfect position to capitalize on that pandemic moment, and it did.
But fast forward to today, and the company's outlook is, well, not so great. In its earnings call this week, Instacart reported lower revenue than expected and, worse, said there's going to be a slowdown in growth in the coming quarter.
So half a decade on from the start of the pandemic, Daniel Ackerman has more on the prospects for the grocery delivery business. Instacart sales quadrupled in the first year of the pandemic for obvious reasons.
And while many shoppers returned to grocery stores in person, online ordering has held its own in the last five years. There has been growth consistently across the period, but it has come in fits and starts.
Neil Saunders is managing director at Global Data, and he says in theory, there is still plenty of headroom for grocery delivery. Grocery is still one of the lower penetrated categories within retail for online purchasing.
But realizing that growth could be hard, says Saunders, not least because grocery stores are some consumers' happy place. People like to sometimes touch and see the things that they're buying.
But also, if they're buying something for a meal in an evening, they often like to see what's available. They want the inspiration of buying in-store.
Grocers like Kroger and Walmart are building out their own delivery services. So Bobby Gibbs, a retail consultant at Oliver Wyman, says it's a crowded market.
You're seeing more competition as a lot of the rideshare services have moved more into grocery fulfillment. Then there's inflation, which is once again changing which products we buy, says Sucharita Kodali, a retail analyst at Forrester.
One of the biggest signals of inflation these days is eggs. Eggs and actually steak, too.
And those are two categories which are fairly inelastic in demand. Meaning people will buy their steak and eggs anyway, but when they do...
There's sticker shock. And that, I think, necessarily has an adverse impact on adding other items to your

card. Instacart did report consumers are spending a bit less per order on average.

And Kodali says this all speaks to something broader, something we've been hearing about

in survey after survey lately. Just general consumer malaise.
Kodali says pulling back

on services like grocery delivery could be a theme in the year to come. I'm Daniel Ackerman for Marketplace.

This final note on the way out today, in which I kind of get it, but I don't really get it, saw this in Bloomberg, that more than a billion people are watching podcasts on YouTube every month. They are watching podcasts.
First of all, if you're watching a podcast, is it even a podcast anymore? But also, am I the only one who listens, listens to podcasts when I'm walking the dog or working out or cooking or whatever? Wait, don't answer that. YouTube, by the way, says it was a pandemic thing.
That's when people started watching podcasts. Also, you kids, get off my lawn.

Sorry.

Our media production team includes Brian Allison, Jake Cherry,

Jessen Duller, Drew Jostad,

Gary O'Keefe, Charlton Thorpe,

Juan Carlos Torado, and Becca Weinman.

Jeff Peters is the manager of media production.

I'm Kai Rizdahl.

We will see you tomorrow, everybody. This is APM.