Macro Minute: Week of March 10, 2025
Last week, I covered the slowing economic data coming out. Today, I would like to continue looking at economic data by covering the employment situation and also give a peak into what’s happening abroad.
As a reminder to us all, employment is a Federal Reserve mandate because it is crucial to economic growth and recession prevention. As long as job loss is not pronounced, the vicious cycle of recession does not occur, even though we may experience perceived economic weakness. The current fear in the market is from an uptick in uncertainty around tariffs and trade. With that uncertainty, we have businesses unsure on how to act until further clarity comes on policy. This may cause a pausing of hiring plans or expansions or just being a bit more cautious in revenue guidance. You could also see consumers waiting to see what will happen and be more cautious on spending plans.
As we have this moment of weakness in the U.S., we are experiencing a bit of a boom overseas. This is coming in the form of fiscal spending and monetary accommodations in Europe, China, and Japan. China began increasing fiscal spending last year. Japan has been making significant changes to become a more equity friendly market for a couple of years. Europe has now announced significant plans to increase defense spending. If you add in increased spending and a potential end to the conflict in Ukraine, you have a potentially compelling investment opportunity.
Now, moving back to the U.S. employment data. We had a weaker than expected ADP private payroll report last week. We also had a significant Challenger report showing over 172,000 layoffs in the month of February, with over a third of those being government employees. As a result, the unemployment rate moved a bit higher to 4.1% from 4.0%. Despite this, February payrolls were in line with targets. So far, we are continuing to witness a resilient U.S. economy. In the most recent earnings season, when companies were cutting their forecasts, earnings remained strong with growth of 10%. While it certainly feels like we are experiencing much more turmoil, we have not seen a meaningful deterioration in the economic data to date. We are seeing a softening, but not a retraction. I showed the sharp decline in the GDP Nowcast last week, but remember that is being greatly influenced by the trade data that is currently in flux. It will also be interesting how the next reading on March 17th incorporates the latest data.
While I am still very attentive to the current state of markets and the economy, nothing is screaming at me that things are breaking badly. A more cautious stance is probably appropriate given the amount of uncertainty out there, but not so much that you jeopardize your long-term goals of compounding returns. Remember the last thing we as investors want to do is stop the compounding unnecessarily.
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