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Economic Growth Slows; Tariffs and Inflation Concern Grows
What a week. The U.S. economy appears to be cooling, but it’s too early to call for a recession just yet. GDP growth hit 2.5% in Q4, fueled by a robust 4.2% increase in consumer spending. However, Q1 is shaping up differently, with various growth measures trending poorly and causing the Atlanta Fed's GDP tracker to forecast a -2.4% contraction. The slowdown is partly due to a surge in imports as companies stockpile goods ahead of potential tariffs. Consumer spending, which comprises 70% of GDP, has also weakened significantly, dipping from 4.1% growth in Q4 to just 0.4% in early 2025.
Corporate earnings mirrored this trend, with S&P 500 profits surging 18% year-over-year in Q4, the strongest since 2021. However, growth expectations for the first half of 2025 have been revised downward, with Q1 earnings forecasts slipping from 11.5% to 7.3%, and Q2 from 11.3% to 9.7%. Despite these short-term headwinds, full-year earnings growth is still projected at a healthy 11%.
Some view the possibility that a softer economy could nudge the Federal Reserve toward rate cuts as a positive. However, weak growth amid persistent inflation could spell trouble. While Fed Chair Jerome Powell signaled patience, markets now expect two or three rate cuts in 2025, easing from earlier expectations of none. Lower rates could provide a cushion for both consumers and businesses, but only if inflation remains under control.
Tariff uncertainty remains a key wildcard for businesses and consumer demand. The administration’s decision to impose 25% tariffs on Mexican and Canadian imports (now postponed until April) has rattled markets. The risk of retaliatory tariffs from Canada, the EU, and other economies adds another layer of unpredictability to an already tumultuous year. Government cost-cutting and looming federal layoffs could further dampen job growth, though February’s labor report showed a still-resilient job market with 151,000 new jobs added and unemployment inching up to a still muted 4.1%.
Markets have reacted with caution. The S&P 500 is down 2% year-to-date, and the Nasdaq slipped 6% after both indices posted two years of stellar gains. Defensive sectors like healthcare and consumer staples are leading, while the high-flying tech names have taken a breather. Investors are also eyeing opportunities abroad, shifting toward European and Chinese tech stocks for better valuations and diversification.
The bond market is playing its normal role as a safe haven. The 10-year Treasury yield, which peaked near 4.8% in January, settled at around 4.3% as growth concerns mount. If rate cuts materialize, bonds could continue to provide stability amid stock market volatility.
What This Means for Investors
Market pullbacks of 5-15% are historically normal and often present buying opportunities. In 2023 and 2024, there were intra-year drawdowns of 10% and 8%, respectively. We’re likely to see elevated volatility as the market digests so much new information. With no clear recession in sight, long-term investors should stay diversified, consider rebalancing, and avoid panic selling. As always, patience and discipline tend to win out over trying to time the market.
Market Activity
International stocks are the star of 2025 so far, which if you squint, may offer a reason to discount all the recession fears. If the US was headed for a devastating recession, other countries wouldn’t have positive outlooks. China and Europe are running higher and this is a demonstration that investors are still positive about global economic conditions. Those markets would find it harder to rally if a devastating trade-driven recession was spreading.
Stocks
Fixed Income
The 3Mo-10Yr has been inverted for slightly more than a week and is looking like its about to un-invert. The 10Yr is up 16 bps off its recent low. The 2Yr is back at 4% after briefly sitting at 3.96% for a few days. Fed Chair Powell spoke on Friday about being “in no rush”, but 3 cuts are now being expected, with a higher likelihood the first could come in May.
Economic Reports
If it hadn’t been such a crazy week with layoffs, tariffs, and rehashing last week Ukraine meeting, the results from this week’s economic reports probably wouldn’t have caused so much friction. We had some beats and we had some misses. ISM reports all remain above 50, designating continued expansion even when below forecast. ADP survey provided fresh panic that didn’t really match reality on Friday. In fact, given the downward revision for January, the payrolls turned out to be a uptick MoM. Unemployment rose, but remains very low.
The real fear is in what happens over the next few weeks, as the federal layoffs and their downstream effects will start to be captured. CPI is on deck for next week and a upside surprise will send markets reeling.
This Week
Next Week
Earnings Releases
Positive earnings aren’t offering much solace to investors. Outlooks aren’t sunny enough (case in point: CRWD, TGT, MRVL, MDB etc. which got hammered) . Negative earnings are catnip for doomers. Don’t expect much to change next week since most of the heavy hitters already happened and the rest aren’t going to rise above the noise.
This Week
Next Week
Recommendations
Unfortunately its another big week for trade, government, and policy.
Tariffs, DOGE, and Economics
- Trump Takes the Dumbest Tariff Plunge | The Wall Street Journal took the gloves off to call out the administration (again) with words they are sure to understand.
- Trump's Blockade of America | Trump's Tariffs on Mexico, Canada, & China Are the Single-Largest Trade Restriction in Modern US History. Great charts.
- DOGE recession? | DOGE is unlikely to cause a US recession, but its "move fast and break things" approach raises the risks.
Let’s Talk About Goals
- An Orchestrated Recession? Trump’s Tariffs, AI, and the Future of US Power | Kyla Scanlon discusses her potential ‘why’ behind recent trade and cost-cutting. Is chaos for chaos’ sake the real goal?
Banking
- Two Americas, one bank branch, and $50,000 cash | If you’re tired of politics and policy, this one is for you. Assuming you have the time and interest in a 6,700 word piece on minutia of banking and compliance.
Chart(s) of the Week
The latest GDPNow model from the Atlanta Fed projects a -2.4% real GDP growth rate for Q1 2025, showing a slight improvement from -2.8% just days ago on March 3. This uptick follows recent data releases, including auto sales, ISM services, and trade data.
As scary as these reports have been over the last week, an up trend is a positive sign even if the absolute output is still negative. This is a purely quantitative model and doesn't account for the tariff front-running that took place in earlier in the quarter. US consumer spending, even when weaker, is still a sight to behold and as warmer weather appears, so will the dollars.
While such a full week of negative news is concerning, I am optimistic we'll land on a positive Q1 GDP number when all said and done. The next GDPNow report will be on Monday, March 17 and I won’t be the only one watching it like a hawk.
Trump is now pressing for more of a scalpel than a chainsaw from DOGE. And there is (temporary?) tariff relief for Canada and Mexico. Both will still have a m impact on GDP and inflation. Bloomberg projects inflation to be 0.2% higher, and GDP to be 0.5% lower. Debt becomes harder to manage and it puts the Fed in a difficult position on easing rates. I don’t think Powell will budge to political pressure.
Source: Bloomberg SHOK model, Apollo Chief Economist
Source: Bloomberg SHOK model, Apollo Chief Economist
Tall Lines
Source: @gregdaco via Daily Chartbook
Related: Momentum vs. Reality: Are the Good Times Slipping Away?