This wake-up is a bit more than usual, an old-fashioned jangly alarm clock disrupting a fitful sleep. Significant tariffs will be imposed by the US this week on a wide variety of products and trading partners. At the same time, previously imposed trade actions (especially steel and aluminum tariffs), federal employment reductions, and federal health care spending cuts are starting to take effect. The actions affecting the economy have been so rapid and, occasionally, irregular that sorting out reasonable time lags and parsing out the actual from the speculated and feared is difficult, if not impossible. It seems safe to say — though not particularly helpful to say it — that the near-term path for the US economy will only be clear in hindsight through a backward look at the fork in the road.
As highlighted by Federal Reserve Chairman Powell during his recent press conference, base case economic scenarios, by and large, have not changed and do not incorporate recession forecasts. While this may be reassuring, the lack of a recession forecast at this moment is primarily because of the great uncertainty surrounding the developments mentioned above and the fact that most of the impact of those developments is yet to come. What HAS been noticeably changing, however, are the risk assessments surrounding base case scenarios. Specifically, a majority of the risk is now perceived to be on the downside for economic activity and on the upside for inflation. In relatively stable times, businesses and individuals will make decisions within a rough framework of a base case scenario with a 50% probability and a best-case and worst-case scenario, each having a 25% probability. At inflection points or during times of extreme and unexpected developments (often exogenous, such as the outbreak of war or the advent of a natural disaster), the base case may continue to have a 50% probability, but one of the alternative scenarios will be assigned a probability almost as high. Both scenarios will heavily influence business decisions. Said another way, there are times when the alternative to the base case or standard scenario is so exceptional that, in fact, it is the alternative scenario that comes to dominate decisions.
Most current economic forecasts indicate an expectation for approximately 1.5%-2% US economic growth in the first and second quarters, followed by some slowing in the remainder of the year and a modest but sufficient annual GDP growth of just under 2%. Such a forecast would imply that the current deterioration in consumer and business confidence verges on hysteria and would be consistent with continuing solid numbers for consumer spending, personal income, and employment. However, it is uncomfortably possible that first-quarter GDP growth will make its debut at less than 0.5%, setting the stage for further deceleration across the year. This was not a commonly held view as recently as eight weeks ago. The economic risks are rapidly being recalculated, along with the very specific business implications of being wrong.
Data to Watch:
- US JOLTs job openings for February, released Tuesday, April 1
- Euro Area Inflation Rate for March, released Tuesday, April 1
- Institute of Supply Managers Report on Manufacturing Employment, Prices and New Orders for March, released Tuesday, April 1
- Final US Purchasing Managers Surveys for March, released Thursday, April 3
- Nonfarm Payrolls, Unemployment Rate and Household Survey Employment for March, released Friday, April 4
Suggested Reading:
- Stagflation on the radar for the US economy, but no repeat of the ’70s
- Selling Your House This Spring? You Might Need to Cut the Price
- Tariffs on Screws Are Already Hitting Manufacturers
- China to Recapitalize Four Big Banks With $69 Billion
Weekly Commentary
Economic Commentary – March 31, 2025
Jeanette Garretty
This wake-up is a bit more than usual, an old-fashioned jangly alarm clock disrupting a fitful sleep. Significant tariffs will be imposed by the US this week on a wide variety of products and trading partners. At the same time, previously imposed trade actions (especially steel and aluminum tariffs), federal employment reductions, and federal health care spending cuts are starting to take effect. The actions affecting the economy have been so rapid and, occasionally, irregular that sorting out reasonable time lags and parsing out the actual from the speculated and feared is difficult, if not impossible. It seems safe to say — though not particularly helpful to say it — that the near-term path for the US economy will only be clear in hindsight through a backward look at the fork in the road.
As highlighted by Federal Reserve Chairman Powell during his recent press conference, base case economic scenarios, by and large, have not changed and do not incorporate recession forecasts. While this may be reassuring, the lack of a recession forecast at this moment is primarily because of the great uncertainty surrounding the developments mentioned above and the fact that most of the impact of those developments is yet to come. What HAS been noticeably changing, however, are the risk assessments surrounding base case scenarios. Specifically, a majority of the risk is now perceived to be on the downside for economic activity and on the upside for inflation. In relatively stable times, businesses and individuals will make decisions within a rough framework of a base case scenario with a 50% probability and a best-case and worst-case scenario, each having a 25% probability. At inflection points or during times of extreme and unexpected developments (often exogenous, such as the outbreak of war or the advent of a natural disaster), the base case may continue to have a 50% probability, but one of the alternative scenarios will be assigned a probability almost as high. Both scenarios will heavily influence business decisions. Said another way, there are times when the alternative to the base case or standard scenario is so exceptional that, in fact, it is the alternative scenario that comes to dominate decisions.
Most current economic forecasts indicate an expectation for approximately 1.5%-2% US economic growth in the first and second quarters, followed by some slowing in the remainder of the year and a modest but sufficient annual GDP growth of just under 2%. Such a forecast would imply that the current deterioration in consumer and business confidence verges on hysteria and would be consistent with continuing solid numbers for consumer spending, personal income, and employment. However, it is uncomfortably possible that first-quarter GDP growth will make its debut at less than 0.5%, setting the stage for further deceleration across the year. This was not a commonly held view as recently as eight weeks ago. The economic risks are rapidly being recalculated, along with the very specific business implications of being wrong.
Data to Watch:
Suggested Reading:
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