Since the start of March, financial markets have had to deal with forces not directly linked to either domestic economic demand or the usual short-term economic factors. Overwhelmed by events, economists and market strategists are likely wondering whether they need to become political scientists. Or do they simply stick to a rigorous analysis of macro and microeconomic indicators?
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To help economists reflect on the wider issues currently shaping their analysis, we have summarised in several recent articles the main events in the US, China and the eurozone during the first week of March. What more can we say?
Since its record high on 19 February, the US S&P 500 equity index has lost 8.6%, 5.7% of that since the beginning of March (as of the 10 March closing). Compared to the end of February, the broad eurozone equity index lost 0.8%, the Nikkei 225 index was down modestly (-0.3%), while Chinese equities were up by 4.3%.
US equity markets have been in the front line – not surprisingly given their previous trajectory. Tech stocks have underperformed, with the NASDAQ composite index falling to its lowest level since 11 September 2024 after a 12.9% decline since 19 February. Does a 4% drop in the NASDAQ index on 10 March mark the latest ‘Black Monday’?
The lack of clarity on US economic policy at all levels is the main reason for the fall in equities. More to the point, investors now think the White House’s policies could lead to a US recession.
A recession in 2025?
Does this mean that the chair of the US Federal Reserve (Fed), Jerome Powell, was wrong when, on 7 March, he said that ‘the US economy continues to be in a good place’ and that ‘many indicators show that the labour market is solid and broadly in balance’?
No – or at least, not yet. In our view, the concerns reflected in the behaviour of financial markets (falls in equities and long-term bond yields) seem excessive. The negative scenario for the US economy is the result of a combination of disappointing indicators and legitimate questions about the consequences of future economic policy.
The economic data published in recent weeks does not materially reflect the impact of the decisions taken since 20 January. It is mainly the soft data that has disappointed, with conflicting outcomes from business surveys.
The US employment report – which often colours the mood in financial markets – was received on 7 March with general indifference. Net job creations came in roughly in line with market expectations (151,000 vs. 160,000, according to the Bloomberg consensus).
The other part of the employment report (the so-called household survey) revealed a rise in the unemployment rate (from 4.0% to 4.1%) as well as the rate obtained by adding the total of unemployed people marginally attached to the labour force to the total unemploiement and persons employed parttime for economic reasons (from 7.5% to 8.0%). Here, it seems that Jerome Powell was not wrong.
Published on 5 March, the February read-out from the Institute for Supply Management (ISM) business survey was much better than that from other purchasing managers’ indices (PMI). The ISM services index came out at 53.5 (from 52.8 in January); more worrying was that the S&P Global US Services PMI fell for the second consecutive month to 51, marking its lowest since November 2023.
We are not minimising the potential future difficulties for the US economy, but we think the running estimate of real time GDP growth by the New York Fed seems more relevant now than the Fed of Atlanta’s GDPNow, which provided good approximations in 2024.
Consumer confidence indices have been falling, with consumers arguably primarily concerned about the recent price increases in some products.
The National Federation of Independent Business (NFIB) survey of small business confidence fell in February. It was the second consecutive decline, taking the index back to 100 after it had jumped to 105.1 in December 2024 following the Republican Party’s clean sweep in the November elections. Comments on the results of this survey, which still shows optimism at above the long-term average (98), highlighted the high level of uncertainty in the responses.
Uncertainties on all fronts
Uncertainty – in the economic context when we do not know the likelihood of future events – will likely make the difference between the US economy growing close to its potential in 2025 (after 2.8% in 2024), which remains our central scenario, and the onset of a recession.
It is well documented that uncertainty over regulation (here encompassing the rules of international trade) and fiscal policy can delay investment decisions. It can thus weigh sufficiently on growth as to cause a recession or at least a sharp slowdown.
Delaying irreversible investment is likely to have more lasting effects on activity than hiring freezes or, for households, postponing big-ticket purchases (other than housing).
There is also uncertainty in Europe over decisions that may be made in the US. In a recent press briefing, the Governor of the Bank of Finland, Olli Rehn, presented his calculations of the possible effects of a trade war. He assumed a 25% US tariff on imports from the eurozone and a 20% US tariff on imports from China, with symmetrical retaliatory measures imposed on US exports to both regions.
Rehn’s calculations showed a broad-based decline in growth compared to the baseline scenario: -1.1 percentage point (ppt) in the US, -1.5ppt in the eurozone, -2.5ppt in China and -0.5ppt for global growth.
Rehn used this modelling exercise in concluding on the need for substantial investment in defence spending. He called for Europe to come up with European solutions ‘in an environment where public finances are under pressure’. Central bankers are not normally so direct when talking about fiscal policy.
Meanwhile, Donald Trump conceded to the US Congress that his trade policy may cause ‘a little disturbance’. We believe that is an understatement. If the ‘little disturbance’ and the associated uncertainties continue to weigh on the sentiment of Main Street and Wall Street, investors’ attitudes could change radically.
