Self-fulfilling prophecy? Self-fulfilling prophecy? http://www.georgiaprime.com/ga/static/images/ga/ga-logo-amp.png http://www.georgiaprime.com/ga/daf\images\insights\article\white-house-podium-small.jpg March 31 2025 March 28 2025

Self-fulfilling prophecy?

Concern about Trump’s tariffs and sticky inflation seem to be deflating consumer confidence.
Published March 28 2025

Bottom Line

The S&P 500 soared 20% from early August into mid-February, to a record high of 6,147, as investors enthusiastically embraced the prospect of more constructive fiscal policy plans out of the new Trump administration. But that upbeat mood has clearly soured over the past six weeks, as many of Trump’s plans, particularly the implementation of reciprocal tariffs on April 2, have roiled financial markets. Stocks have dropped nearly 11% over this period, and Trump’s self-proclaimed “Liberation Day” this Wednesday may turn out to be “Disappointment Day” for investors, as we may not receive the fog-clearing clarity we envisioned.

Hard versus soft data To be sure, the so-called hard economic data has been fine. Several high-profile examples:

  • Gross domestic product for the fourth quarter of 2024 was revised up a tick to 2.4%.
  • Initial weekly jobless claims for March at 225,000 was steady; this is the number the March jobs report will use.
  • Core retail sales in February rebounded to a 1.0% month-over-month (m/m) gain, up from a 1.0% m/m decline in January.
  • Gas prices have declined 15% over the past year to $3.15 per-gallon.
  • Capital goods shipments, nondefense ex-air, leapt 0.9% m/m in February, up sharply from a 0.2% m/m decline in January.

Phillips Curve tug of war But the heady progress we have enjoyed in reducing inflation from its worst levels in 40 years has stalled. At the same time, last year’s surge in business and consumer confidence, largely due to election-related enthusiasm, has reversed in recent months. And while the Federal Reserve did not change interest rates last week, it did implement several major adjustments to its Summary of Economic Projections. Policymakers significantly lowered estimates for GDP growth and increased expectations for both inflation and the unemployment rate. So, if inflationary pressures are firming and the unemployment is rising, the Fed could act in two opposing ways: dovishly by focusing on the deteriorating labor market and cut rates, or hawkishly by attending to sticky inflation and hold rates steady (or perhaps even hike them)?

Self-fulfilling prophecy While the risks of stagflation have clearly increased this year, is it possible the US is talking itself into a recession, given our billowing downbeat sentiment? We at Federated Hermes worry about this but still firmly expect the Fed and Trump to guide the economy onto the runway for a soft landing. We expected softer economic growth at the end of 2024 and still anticipated that scenario this year as the administration implements Trump’s tariffs and other fiscal policy plans. But we remain hopeful that economic growth will accelerate in 2026 and 2027. Why? Because we think the seeds the president is planting will eventually bear fruit: deregulation, more fossil fuel production, a secure southern border, increased government efficiency, and corporate/individual tax cuts.

Inflation has been persistent Investors seem concerned that Trump’s tariff and immigration policies could exacerbate the situation:

  • Core PCE inflation (the Fed’s preferred measure) declined significantly from its peak of 5.6% year-over-year (y/y) in February 2022 to 2.6% last June. But it has stalled around 2.7% y/y over the past eight months and reached 2.8% last month. The Fed is targeting 2% by year-end 2027.
  • Core PPI wholesale inflation peaked at 9.7% y/y in March 2022 before plunging to 1.8% in December 2023. But this metric has since re-accelerated, more than doubling to 3.8% y/y in January 2025, before falling to 3.4% y/y in February 2025.
  • Core CPI retail inflation has declined steadily from a peak of 6.6% y/y in September 2022 to 3.4% y/y in May 2024, but it has stalled at 3.2-3.3% over each of the next eight months through January 2025, before falling to 3.1% in February 2025.
  • Average hourly earnings growth peaked at 8.1% y/y during the pandemic in April 2020 and has been grinding down by half to 4.3% in January 2024. But wage inflation has stalled at 3.9-4.2% y/y growth over the past year, with February at 4.0%. The Fed is targeting 3.0%.

Round trip on confidence, with a surge in inflation Business and consumer confidence soared last year due to election-related enthusiasm. But the indices have surrendered their gains—and then some—in recent months due to escalating tariff-related concerns, and inflation expectations have skyrocketed:

  • University of Michigan Consumer Sentiment survey soared from an eight-month low of 66.4 in July 2024 to an eight-month high of 74.0 in December 2024.  But the index has since plummeted to a three-year low of 57.0 in March 2025. In addition, respondents’ one-year inflation expectations leapt to a three-year high of 5.0% in March, nearly double last November’s 2.6% forecast. Moreover, the index’s 5–10-year inflation expectations rose to a 33-year high of 4.1% in March 2025, up from 3.0% in December. 
  • Conference Board’s Consumer Confidence Index rose from a nearly two-year low of 97.5 in April 2024 to a 16-month high of 112.8 in November 2024. But the index has since plunged to a four-year low of 92.9 in March 2025. In addition, its expectations index plummeted from a three-year high of 93.7 in November 2024 to a 12-year low of 65.2 in March 2025. 
  • NFIB Small Business Optimism Index rose from an 11-year low of 88.5 in March 2024 to a six-year high of 105.1 in December 2024. But the index fell to 100.7 in February 2025.

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DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Phillips curve: An economic model that portrays an inverse relationship between the level of unemployment and inflation on an historical basis but has come under doubt in recent decades. 

The Conference Board's Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

The Personal Consumption Expenditure Index: A measure of consumer inflation at the retail level that takes into account changes in consumption patterns due to price changes.

Producer Price Index (PPI): A measure of inflation at the wholesale level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

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