Revisions Smell of Stagflation

Jeffrey Roach (00:03):

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial with three key charts to explain the current macro landscape. First, revisions smell of stagflation. Fed officials appear more downbeat about growth, paving the way for some downside risk to the dollar and more market volatility from an unclear growth path. From the latest projections you see in this chart, Fed staff expects growth to be 1.7% by the end of 2025, and that's down from the December forecast of 2.1%. The unemployment forecast rose to 4.4% from 4.3%, and core inflation, on an annual basis, is expected to be 2.8% from 2.5% estimated in December. Now stagflation, it's a combination of low or no growth with persistent inflation, is not just a domestic risk. At the last meeting of the Bank of England, concerns across the pond are mounting about the same issues, since trade wars benefit no one, with impact across national boundary lines.

Jeffrey Roach (01:02):

Second, weakness, but no recession yet. If you believe the latest survey data, whether it's from the conference board or from the University of Michigan, you would think the economy is on the cusp of a recession. Now, granted, the decline in confidence for both consumers and businesses is significant and not to be ignored. A change in feelings about the economic backdrop is often a harbinger of things to come and precedes a downshift in consumer spending and business investment. However, the reality is the U.S. economy is quite resilient even during times of difficulty. Now, since World War II, a recession comes around every five or six years, but only lasts 10 months on average, the COVID-19 recession only lasted two months, the shortest on record. Each recession begins with some exogenous shock to the economy, such as a terrorist attack, a banking failure, or a global pandemic.

Jeffrey Roach (01:56):

We don't see such a shock on the horizon. Third, inflation should ease by summer. Given the decline in goods prices, and the slow deceleration in several services sectors, we should expect inflation metrics to improve by the summer. There are some categories that should be somewhat immune to trade wars, so if demand for things like travel and recreation soften, we should expect the services side of the inflation situation to ease a bit while we wait for the unknowns from tariffs. From the corporate front, we have already heard some companies, like a German automobile manufacturer say they don't plan to pass along the cost from tariffs at least for a month or so. The other key factor for understanding tariff impacts is the sensitivity consumers have toward price changes. Now, consumption patterns change as relative prices change, which is making things difficult for forecasters, trying to predict the effects of broad tariffs. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.