Macroeconomic Update: Reduced Visibility Ahead

Entering 2025, we questioned whether the economy could continue to be resilient or if we were due for a decline in economic activity. While we were initially leaning in the direction of sustained unemployment, moderating inflation, and steady growth, we now have to consider the economy decelerating more significantly this year.

The employment picture has remained relatively resilient, and the unemployment rate currently sits at 4.2% (March 2025). After bottoming out at 3.4% in April of 2024, unemployment has increased steadily. However, it remains near the level the Federal Reserve considers “full employment.” The strength of the labor market has long been our key barometer for the strength of the U.S. economy, as 2/3rds of economic activity comes from consumption. While our base case for unemployment remains strong, the risks to our view have increased. Layoffs in the public sector combined with hiring freezes due to economic uncertainty could make for a tougher job market. We will continue to monitor data on employment trends and incorporate any new information into our outlook.

As the employment picture has become slightly cloudy, the inflation outlook has remained opaque. We had anticipated inflation to decline more than it has. Earlier expectations for inflation to moderate have failed to materialize to this point. While inflation is well below the peak in the summer of 2022, it is still stalled out above the Federal Reserve’s long-term target of 2%. As of February, Headline CPI was 2.8%, and Core CPI was 3.1% (for the preceding 12 months). CPI data for March will be released later this week. However, the potential impact of tariffs on inflation for the remainder of this year is unknown. In their most recent Summary of Economic Projections (released March 19th), the Federal Reserve increased their expectation for where inflation would end the year, and it is roughly in line with the level for the last 12 months and did not account for the potential of the impact of tariffs. While we do not expect another round of rate hikes like in 2022, we cannot declare that there is any clearer picture of inflation at this point and would likely incorporate a 2.5-3% level of expectations into our outlook.  

The uptick in uncertainty has increased the risks of an economic slowdown and even raised the possibility of recession later this year. While we do not expect a recession in 2025 or a protracted economic slowdown, we must admit that the probability of a recession has undoubtedly increased. The heightened volatility we see today can cause some businesses to pull back from taking risks and expanding. This reduction in business activity can result in a reduced risk appetite and lead to a slowdown in economic activity. As of April 7th, The Atlanta Federal Reserve is projecting -2.8% GDP for Q1 2025. This is on the back of robust growth in 2024. One-quarter of negative GDP does not mean recession, but it does show that the economy is taking a breather to digest all of the uncertainty that currently surrounds it.

With growth slowing, inflation sticky, and job growth steady, the Federal Reserve faces difficulty managing the two sides of its dual mandate. The Fed is charged with promoting maximum employment and stable prices. Acting to sure up jobs by possibly lowering rates could have the unwelcome effect of stoking inflation, but failing to act could lead to the deterioration of the employment picture. Expectations for the Fed to cut rates have changed multiple times throughout the year so far. Current expectations are for the Fed to cut rates 75-100bps this year, while the Fed’s most recent public forecast (March 19th) is for 50bps of cuts. This will likely change again as the impact of tariffs becomes clearer.

Today, the economic picture is clouded. As a result of this cloudy outlook, we have maintained our focus on holding diversified portfolios of high-quality equities, fixed income, and alternatives. Having a precise controlled risk management process is our remedy for these uncertain times. The picture will eventually become clearer and give way to additional investment opportunities. In the meantime, we will be patient.

This Commentary is provided by Spraker West Wealth Management, a registered investment advisor, and is for informational purposes only. It should not be construed as investment advice and is not intended as a solicitation of any specific product or service. Investments and/or investment strategies include risk including the possible loss of principal. There is no assurance that any investment strategy will achieve its objectives. Information provided is not intended as tax or legal advice and should not be relied upon as such. You are encouraged to seek tax or legal advice from a qualified professional.