Trade, Tariffs, and Trajectories

Jeffrey Roach (00:08):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial with three talking points for the current macro landscape. First, expect a rebound from reopenings. Well, the economy grew 1.4% in the previous quarter. That's a noticeable dip from the 4.4% annualized growth in Q3. So why the slowdown? And more importantly, what does it mean going forward? The decline in government spending and residential investment contributed to the soft growth figures just released last Friday. But the demand for healthcare services and information processing equipment continue to power the economy. What we think going forward is the reopening of government will provide a boost to the Q1 growth figures, putting our forecast for Q1 growth at 2.9% as consumers start receiving larger than expected tax refunds, powering revenue growth in the first part of the year. Second, Fed officials seem optimistic, but with a dash of concern. One of the more interesting items teased out from the latest minutes is the Fed seems to think financial stability risks are building under the surface.

Jeffrey Roach (01:19):

Asset valuations are high, credit spreads are tight, and AI related investment has created new pockets of risk, especially in private credit leveraged firms and highly concentrated tech names. And they specifically called out the hedge funds, hedge fund leverage, and Treasury market vulnerabilities remain key concerns. Now, looking ahead, we should monitor potential spillovers from volatile global bond markets and FX consumer spending. Wealth effects and heavy AI related investments are keeping growth steady. So we expect above trend GDP growth this year. Personally, the anticipation is building for the updated summary of economic projections released at the March 18 meeting. I expect the next cut in Fed funds won't be until summertime. Third, tariffs are here to stay. Late last week, the Supreme Court of the United States affirmed the rulings of lower courts that the president cannot use the International Emergency Economic Powers Act to authorize tariffs, but the president has other legal strategies to impose tariffs on a broad range of products.

Jeffrey Roach (02:33):

So we should not expect tariffs to go away, but we do expect that the average effective tariff rate will decline marginally. So instead of a 12.7% effective rate, according to Fitch Global Ratings, we could have something closer to 10% or maybe even less so after the dust settles. Weaker tariff policies would provide a short-term boost to growth and an improvement to inflation. The greatest risk we likely face is that our trading partners may forge new global partnerships that sideline the United States in an effort to avoid policy uncertainty. And that's something to watch in the months ahead. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.