Economic Activity Temporarily Stalls Due to Fed Policies Hindering Expansion
A Week of Historic Hikes and Uneasy Markets
Looks like we've just witnessed a sight unseen for over two decades - nine successive market upswings, baby! From May 2nd, the S&P 500 and Dow Jones Industrial Average were these lucky winners, with the former jumping 9.6% and the latter climbing 8.2%. But the Nasdaq and small-cap Russell 2000? They didn't take part in the winning streak during April 21-May 2, but they still posted impressive figures, increasing 13.3% and 9.8%, respectively.
After such a hot start, it's no surprise that the markets are taking a breather this week. Check out the table below - a flat line for all four major indexes, with small losses here and there. Despite all the media buzz, every index is in the red for the year, with the small-cap Russell 2000 leading the pack with a decline of over -9%.
So, what's up with the Magnificent 7? It's a mixed bag, with Nvidia and Tesla up, while Apple and Google are showing losses. The simple average for the week also reflects this tightrope act, remaining essentially unchanged.
It seemed like the markets were on a wild rollercoaster ride, reassessing their direction.
The Fed Steps In
Even though the future looks a bit dim in the economic forecast, the Federal Reserve maintained its interest rate during its May 6-7 meeting and expressed its concerns about growing uncertainty in the economy. In economics speak, this usually means businesses and consumers tighten their belts, leading to lower investment levels and increased savings (which equal less spending). The leading indicators are painting a slowing economic picture.
It's no secret that monetary policy actions take several months to make a real impact. So, it makes sense for these actions to align with signals from the leading economic indicators.
Time for Some Sci-Fi
Enough with the economics chat! It's time to dive into the world of science fiction, as the best new show in the genre hits our screens with a perfect 100% critic score!
And of course, let's not forget about our beloved iPhones. Apple has just served up 33 reasons to update iOS 18.5 right now!
NYT Mini Crossword: Perfect for a Break
Need a little brain break? Check out the hints and answers for the NYT Mini Crossword on Wednesday, May 14!
Leading Indicators Take a Dive
Speaking of economic matters, the FIBER Leading Indicator series has descended into the negative zone for the first time in two years, and the Conference Board's Leading Economic Indicators reported a decline of -0.7% in March, making it the fourth consecutive monthly drop and the twelfth in the last 13 months. Critics might argue that these negative readings haven't led to a recession yet, but let's not forget that the Q1 GDP growth was -0.3%, and expectations are that Q2 might follow suit. If that's the case, we'll have two negative GDP growth quarters on our hands, which is the textbook definition of a recession, mate!
Tariffs and Trade
The tariff file is a major source of uncertainty, especially when it comes to China. Maersk, the world's largest shipper, recently noted a decline in shipping volumes between the U.S. and China of -30% to -40%. Bookings for China-to-U.S. shipments have plummeted an impressive -60% since April 9. Container traffic at Southern California ports was down by -35% the week of May 9 compared to the same period last year. And the list of companies trimming guidance continues to grow, with the likes of Ford, Mattel, Clorox, and Kellogg joining the club.
Consumers Behaving Badly?
As for consumers, they're showing signs of tightening their belts, too. Revolving credit balances (which include credit card debt) fell by an eye-popping $-54.7 billion in Q1, according to Rosenberg Research. These balances have been decreasing in five out of the last seven months. In the most recent (April) New York Fed Survey of Consumer Expectations, 14% of respondents confessed that they would struggle to meet their minimum debt payments over the next three months. That's dangerously close to the 16% level we saw during the early days of the pandemic, folks!
Inflation: Not So Hot Anymore?
Recent trends suggest that inflation, fuelled by the tariff scare, has been maintaining a steady 3.6% one-year expectation, according to the New York Fed Survey. This is the highest level since September 2023. Perhaps this concern played a role in the Fed's decision to hold off on rate adjustments on May 7.
But fear not! Recent CPI data appears promising, with the year-over-year inflation rate dropping to 2.41% as of March. Our office has discussed the limitations of the BLS' CPI calculation, especially the long lag in the heavily weighted (35%) rental component of the index. So, even though the tariff issue might still be agitating consumers, let's keep our eyes on the CPI, as we anticipate that the 12-month inflation rate will reach the Fed's 2% goal some time in Q3 or Q4.
Final Thoughts
The financial markets have been dancing the uncertainty tango this week, with major indexes being flat to slightly down, just like the Magnificent 7's simple average. Perhaps the Fed's cautious attitude played a part, as they now seem to be waiting for the soft data to align with the hard data. History teaches us that when the Fed waits for hard data, monetary policy becomes more of an obstacle than a help for economic growth.
We're already witnessing the impact of tariffs, as shipping volumes have taken a nosedive. And let's not forget about the growing number of economically sensitive U.S. companies rescinding their guidance as the future gets murkier.
On the bright side, the signposts point to inflation falling back to the Fed's 2% goal by the end of the year. There are legitimate concerns that the economy may be on the brink of deflation, as the Fed's monetary policy may be hindering economic growth this time around.
And that's a wrap, folks! Join us next week for more insights and perspectives on the world of finance and beyond!
(Joshua Barone and Eugene Hoover contributed to this blog.)
Insights: The overall state of the US economy is uncertain due to ongoing trade tensions and policy uncertainties. Key indicators such as GDP growth, consumer spending, inflation, and leading economic indicators provide insights into current trends and forecasts. The real GDP has been decreasing, and the IMF projects a 1.8% GDP growth for 2025, revised downward due to trade wars and policy uncertainty. Consumer spending remains vital to the US economy, but its growth is affected by factors such as inflation, trade policy concerns, and policy instability. There is a likelihood of a recession, with the unemployment rate projected to rise from 4.1% in early 2025 to 4.5% in 2026. Inflation is expected to rise but not to severe levels, and the Federal Reserve is closely monitoring inflation. The prospect of deflation is a concern due to the Fed's monetary policy potentially hindering economic growth.
- The recent decline in the FIBER Leading Indicator series and the Conference Board's Leading Economic Indicators, accompanied by a Q1 GDP growth of -0.3%, may signal a potential recession in the US economy, given the definition of two negative GDP growth quarters.
- In the realm of finance and investing, the stock market's performance, while showing some recovery in recent weeks, remains uncertain amidst ongoing tariff disputes, particularly with China, and potential policy instability, which may affect major economic indicators like inflation and GDP growth.
