The US Economy Slows in 1Q25
What happened last week?
Last week, the S&P 500, Dow and Nasdaq fell by -3.10%, -2.37% and -3.45% amid escalating and deescalating tariff developments with Mexico and Canada while those recently applied to China rose another 10% to 20%.
What does this mean for investors?
Despite the weak US data and severe policy uncertainty, we are not convinced that the US expansion will breakdown in a self-reinforcing way. There will be greater opportunity when risk is fully priced or overstated.
3 Things to Know
Early US Data Is Worrying
We can observe larger impacts on US assets than broader global markets from the US actions. This is because tariffs are generally paid by US taxpayers and US equities have benefited from foreign-sourced supplies.
Taking all of the policies into account – including measures such as federal job cuts – the impact appears to be broadening beyond markets and becoming more fundamental to near-term US economic performance.
Late last year, US business confidence surged on the prospect of regulatory relief and tax cuts (“avoiding tax increases”).
President Trump in his Congressional address last week discussed a variety of government actions that would reshape the US economy, with potentially positive and negative longer-run consequences. But since year-end 2024, consumer confidence has slid sharply. We expect coming business sentiment readings to follow.
The Federal Reserve Bank of Atlanta’s daily tracking estimate of US real GDP growth in the first quarter is -2.4%. The figure varies widely from day-to-day as new inputs are released and data are revised.
But what is causing the Atlanta Fed to suggest the largest US economic contraction for a quarter since the pandemic of 2020?
Tariffs Likely to Have More Impact Compared to 2018
As we’ve written before, the inflation surge of January can’t be blamed on tariffs.
The three previous January CPI reports overstated the full-year impact. But if large scale tariffs are indeed imposed, we would expect to see the bulk of the impact in sequential price measures during 2Q25, holding down the US economy through the first half of the year.
GDP data can be notoriously misleading. If consumption is down and imports are up, what could “absorb the slack?” While reported with a lag, US inventories should rise sharply.
In an accounting sense, this will offset some of the imports, boosting the US growth measure in a way that the first quarter GDP tracking estimates don’t yet account for. But unless US demand rebounds, trade and even domestic production will weaken some in the second quarter of 2025.
This dynamic clearly suggests the next revision to our annual US GDP forecast (2.4% in our outlook for 2025) should be downward.
Growth and Inflation to Face Pressure
Financial markets attempt to move fast, discounting future events.
At times, they misjudge. At times they are unfortunately reactive. But as the negative tariff and government spending consequences are now being digested, we would not expect the entirety of 2025 to be an endless barrage of incrementally weaker news.
We have built diversified global portfolios to mitigate negative events, even those driven by the world’s largest economy. We will continue to track the US policy news in real time and assess opportunities if and when the gloom becomes excessive.
See our weekly CIO Strategy Bulletin for more details