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It would be wonderful to say that the economy started 2025 with a bang, setting the stage for another year of solid performance. Sadly, that’s not the case, as key data on activity weakened and inflation jumped in January. Happily, one month does not make a trend, so it would be a mistake to extrapolate early-year numbers into the future. For one, data for January are less reliable than in other months. That’s particularly the case since Covid, which greatly disrupted seasonal price and spending patterns and has complicated the task of seasonally adjusting new data. For another, climate conditions are more unpredictable in January, and the presence of devastating wildfires and extreme cold this year made interpreting the data even more of a chore.
On the surface, the U.S. economy is strong. GDP growth is near its short-run potential, unemployment is low, consumers are spending and manufacturing is coming back to life, spurred by AI-related spending on structures and equipment. Based on the strong performance of all key indicators in December, the economy is riding on a good deal of momentum as the calendar turns to 2025. Barring an external confidence-shattering shock, such as an escalation of geopolitical conflicts, an oil crisis or a global trade war that roils international commerce, the U.S. economy should do well in 2025 and, once again, outperform on the global stage.
Amid the chaos surrounding the Trump administration’s on-again, off-again tariffs, the job market sounded a calming note this week. For one, there were no signs of employer panic over trade uncertainty and the incipient recession fears that resonated though Wall Street over the past several weeks. Yes, the outplacement firm, Challenger, Gray & Christmas, reported that a huge 173,000 workers were laid off in February, the highest monthly total since July 2020, when Covid was still wreaking havoc with the job market. But that hardly made a dent in the official unemployment rate, which the Labor Department revealed inched up 0.1 percent to 4.1 percent during the month on Friday. The unemployment rate has remained firmly within the 3.9-4.2 percent range in every month over the past year.
A puzzling dichotomy that received much attention last year continues to cause a good deal of head-scratching among economists, and it’s the wider-than-usual gulf between perceptions and reality regarding the health of the economy. Put simply, a large swath of the population believed the economy was heading for or actually in a recession amid skyrocketing inflation. That perception, of course, clashed with reality, as the economy delivered another solid performance last year and inflation retreated. To be sure, in a highly polarized electorate, political bias contributed importantly to this gap between soft and hard data, with Republicans maintaining a gloomier mindset than Democrats leading up to the elections and vice versa since the elections.
Amid a light calendar of economic data, uncertainty continued to escalate among investors and traders this week. The elephant in the markets, of course, is the topsy-turvy world of tariff threats by the Trump administration, which was further expanded this week to include lumber and encompass more trading partners under the tariff umbrella. It is still unclear what will be put into effect or used mainly as a negotiating tool to gain concessions from trading partners. So far, only the 10 percent tariffs on China have been implemented. But the prospect of an extensive rollout and a possible all-out trade war is infiltrating public sentiment; it remains to be seen if real changes in behavior will follow. One thing is clear: there has been a meaningful uptick in inflationary expectations, as well as a downbeat move in household sentiment regarding the economy and inflation.
Inflation concerns heated up this week, ignited by reports showing stronger than expected increases in consumer and wholesale prices in January. Unsurprisingly, the attention-getting headlines solidified the growing perception that the Federal Reserve will forgo additional rate cuts for the foreseeable future. The financial markets are priced for no cuts through the spring and summer and, at best, see one by the end of the year. A whisper sentiment that the Fed is just as likely to raise as to reduce rates is also gaining some traction, although that still remains a remote prospect in the eyes of most. At his congressional testimony this week, Chair Powell reaffirmed his earlier assertion that the Fed is in “no hurry” to cut rates. We are looking for one reduction later this year but recognize that the odds the Fed will stay put until 2026 have increased.
How you look at this past Friday’s jobs report depends on whether you are a half-full or half-empty type of person. Those with a more jaundiced view of the world will view the slowdown in payroll growth in January as an ominous sign, the first inkling that labor conditions are poised to weaken significantly as the year progresses. The more upbeat observer, however, will look at the January slowdown in a broader context, seeing it as a welcome relief following torrid increases over the previous two months, wherein the already-strong gains were revised sharply higher. What’s more, the preliminary 143,000 increase in payrolls last month is still a solid performance for an economy that is facing mounting headwinds and a swirl of uncertainty.