Weekly Economic Trends and Indicators
Over the last few weeks, the U.S. economy has been buffeted by worrying economic news, financial market volatility and uncertainty over tariff policy. As a result, many analysts have revised their expectations for economic growth in 2025. What are some of the factors that have caused such a large change in expectations? In this first part of a two-part series, we examine the events since the start of the year and how the rise in uncertainty is showing up in the data. Next week, we will consider how these events are likely to impact the economy for the rest of this year and beyond.
Strong but slowing economy at the start of the year
As 2024 ended, expectations for the coming year were generally positive, with most economists not predicting a recession. Although the Federal Reserve had started to ease monetary policy in late 2024, rates were not coming down as quickly as expected because inflation had not yet reached the Fed’s 2% target. Higher rates caused growth expectations to be trimmed downward. Job growth continued to be strong in some sectors such as health care, though notably weaker in manufacturing. Consumer spending, the largest component of GDP, had kept the economy rolling along for the last few years, but some analysts were concerned that any weakness among consumers could snowball into a recession.
Tariff announcements raise uncertainty
In February, President Trump announced tariffs on imports from Canada, Mexico, and China. However, only a couple of days later, the tariffs on Canada and Mexico were paused for 30 days. One day after these tariffs went into effect, autos were exempted for another month.
On April 2nd, President Trump announced a 10% across the board tariff on imports from all counties and higher rates for most counties with whom the U.S. has a trade deficit. For example, a 46% tariff was imposed on Vietnam, a country to which a number of companies had relocated from China. The sizes of these tariffs were much higher than the market expected, prompting a multi-day sell off in the stock market and a very nervous night last Tuesday in the bond market. The latter possibly being the catalyst for the President’s Wednesday announcement of a 90-day pause on most of these new tariffs just hours after they took effect. However, tariffs on Chinese goods remained in effect. At around the same time, China announced additional reciprocal tariffs on U.S. goods. As of last Friday, the U.S. tariff on Chinese goods is 145% (trade-weighted average tariff was 20.8% on Jan. 1) while China’s tariff on U.S. goods is 125% (trade-weighted average tariff was 21.2% on Jan 1). On Monday, the President announced that that he was considering changes to tariffs on computers and semiconductors as well as autos. No specific numbers were announced on Monday, but it is expected that those items could be subject to a lower tariff. Until those rates are known, it is difficult for companies to plan for the future.
Further evidence of how the uncertainty is affecting markets is seen in the value of the dollar. The dollar lost about 4% against the euro last week. While a weaker dollar helps our export sector, this rapid fall in just one week is happening for the wrong reasons as tariff uncertainty has put the global financial system under stress.
Consumer confidence falling and inflation expectations rising
The latest University of Michigan Survey of Consumers showed consumer sentiment at a three-year low and twelve-month inflation expectations the highest since 1981. Consumers understand that tariffs have the potential to raise prices, and that is feeding inflation expectations and weakening their confidence in the broader economy. This raises the concern that the threat of inflation may prevent the Fed from lowering interest rates to stimulate the economy if the trade tensions further harm growth. Next week, we will look at how these factors combine to affect the economic outlook for the rest of the year.
Next week: National economy update (part 2)
