Recent “soft” data continues to flash warning signs, highlighted by Friday’s disappointing consumer sentiment survey from the University of Michigan. Confidence, income expectations and inflation are all heading the wrong way. Some of these signs are starting to be reflected in the “hard” data, pointing to what I strongly expect will be a massive round of revisions to 2025 growth forecasts.
Forget the International Monetary Fund’s January projection of 2.7% US economic growth in 2025 (which constituted an upward revision due to the IMF’s anticipation of stronger demand and a favorable wealth effect). Instead, look for this and other projections to be revised to 2% or below in the next few weeks, with Goldman Sachs Group Inc. already lowering its forecast to 1.7%.
The reasons for these downward revisions are mounting. Concerns about lower-income consumers are compounded by policy uncertainty due to tariffs and Department of Government Efficiency (DOGE) announcements, fueling income and price insecurity and interrupting federal payments to contractors. The Trump administration’s narrative has evolved from the “nothing to see here” to “little disturbances” associated with an economic “detox.”
Soon, analysts and economists will also worry about a negative wealth effect following the sudden plunge in the stock market. This includes the fifth fastest correction for the S&P 500 Index since World War II. It is also likely to become evident that the Federal Reserve’s ability to significantly cut interest rates due to employment and growth worries may be constrained by unfavorable inflation dynamics.
While there is a convergence of views on the bumpiness of the journey, opinions on the destination are quite acute. They may well get even more so in the weeks ahead.Some see this transitional period as improving the US’s longer-term prospects, with a more efficient private sector, streamlined government, less stringent anti-trust rules, tax cuts, lower energy costs and controlled debt dynamics. Internationally, they envision the US operating in a fairer trading system, with more domestic and foreign companies bringing production activities to the US and other countries carrying more of the financial burden for national security.Others fear the US is eroding long-standing structural strengths. They worry about long-term damage to private sector activity due to a less predictable operating environment and inconsistent rule of law. They see the debt burden going up as actual and potential growth falters. They doubt the efficiency gains of the ongoing government reforms and see the US undermining its central economic role as other countries rewire trade relations and move away from the dollar.
While there is much more agreement now about the short-term prospects, it’s too early to be confident about the US economy’s destination. What seems undeniable is that the journey may get even bumpier as the world continues to react to US developments.
