Economic Commentary – February 2025
- SWSCM
- Mar 31
- 5 min read
Updated: Apr 2
Tariff threat turbulence. Linguistics aside, the preceding three-word slogan fittingly describes the unrest and uncertainty introduced into the evolving U.S. economic outlook. Adhering to his campaign pledge to amend trade policy to rectify what he deems to be unfair and imbalanced trade practices, President Trump vowed to swiftly impose import duties on goods ranging from steel, aluminum, automobiles, pharmaceuticals, and semiconductors. Promoting the predisposition that no nation would be immune from the levies (which included long-standing trading partners and western allies), with minimal-to-no exemptions unless there was an unconditional capitulation to his terms, the second-term President ignited fears of a global trade war that rapidly propagated both domestically and internationally. After granting a one-month reprieve, tariffs of 25% on all U.S. imports from Mexico and Canada (with the exception of Canadian energy exports to be taxed at 10%), and 10% on all goods from China were slated to take effect on March 4. Moreover, in addition to broad-based percentage tariffs, the administration plans to implement reciprocal tariffs on all foreign trading partners, on a country-by-country basis, to counter the levies, subsidies, regulations, and/or value-added-taxes that each specific nation has imposed on U.S. exports. As one would reasonably expect, all targeted countries announced plans to enforce their own set of countermeasures and retaliatory tariffs aimed at combatting what they perceive to be U.S. aggression on the trade front.
In reaction to a looming global trade war and its accompanying ramifications, risk markets shifted their focus and vigilance away from a potential resurgence in inflation, to concerns regarding a possible weakening of economic growth. More specifically, bond market investors seemed to fixate on the increasing prospect of economic deterioration resulting in a near-term slowdown. As a result, bond yields cascaded across the intermediate and longer-dated tenors of the yield curve, driving solid monthly returns for fixed income securities. Contrarily, stocks were battered as equity investors were dismayed by corporations’ issuances of forward guidance riddled with tariff-induced trepidations suggesting future margin compressions and diminished earnings.
Five years removed from the onset of the COVID-19 pandemic, and throughout the U.S.’s subsequent recovery, the labor market has displayed a resoluteness that has captivated the most esteemed economists and policymakers alike. Having been spared from a pronounced exogenous shock, weathering sporadic disruptions at times brought about by natural disasters and isolated labor strikes, job creation has been overwhelmingly positive over the past three and a half years. Ironically, upheaval in the employment landscape portends to emanate via an endogenous shock, as the newly created Department of Government Efficiency had begun to haphazardly eliminate thousands of government agency positions daily, with thousands of more curtailments in the federal workforce still to come.
Over the course of this chaotic month, Fed officials had been steadfast in their stance of exercising patience, while judiciously assessing and monitoring economic developments. As monetary policymakers continued to emphasize that there is no preset course regarding future rate cut decisions, the interest rate futures market had priced in approximately three, 25 basis point rate reductions before year-end.
U.S. Treasury yield curve bull flattened as economic growth concerns overshadowed inflation worries. Yields in the intermediate and longer-dated tenors all underwent month-over-month, double-digit basis point descents, restoring the inversion between the 3m/10y tenor pair.
2-year/10-year spread: 22 basis points
3-month/10-year spread: -9 basis points
2-year/5-year spread: 3 basis points
3-month/30-year spread: 19 basis points
U.S. Treasury Yield Curve Source: Bloomberg
February 2025 Macroeconomic Highlights
Inflation, Expectations, and Consumer Sentiment1:
CPI: 3.0% year-over-year (+0.5% month-over-month); Core CPI: 3.3% year-over-year (+0.4% month-over-month)
PCE: 2.5% year-over-year (+0.3% month-over-month);Core PCE: 2.6% year-over-year (+0.3% month-over-month)
PPI: 3.5% year-over-year (+0.4% month-over-month); Core PPI: 3.6% year-over-year (+0.3% month-over-month) Core PPI less trade services: 3.4% year-over-year (+0.3% month-over-month)
Inflation Expectations: 1-year horizon: 3.0%, 3-year horizon: 3.0%, and 5-year horizon: 3.0%
Consumer Sentiment: 64.7 vs. 71.7 in January 2025; Current Conditions: 65.7 vs. 75.1 in January 2025
Consumer Expectations: 64.0 vs. 69.5 in January 2025
Labor Market2: The U.S. economy added 143,000 nonfarm payrolls in January, short of the 175,000 expected by economists surveyed by Bloomberg. Notable job gains occurred in health care (+44,000), retail trade (+34,000), government (+32,000), and social assistance (+22,000).
U-3 official unemployment rate: 4.0% vs. 4.1% expectation: -0.1% from December 2024.
U-6 unemployment rate (marginalized, part-time workers for economic reasons): 7.5% (unchanged).
Labor force participation rate: 62.6% (+0.1%); Employment-to-population ratio: 60.1% (+0.1).
Average hourly earnings for private nonfarm payrolls rose 17 cents to $35.87 (+0.5% month-over-month, +4.1% year-over-year).
Revisions: December 2024 boosted +51,000 to 307,000; November 2024 raised +49,000 to 261,000.
Gross Domestic Product (GDP)3: According to the second estimate, real GDP increased at an annual rate of +2.3% in the fourth quarter of 2024 vs. +3.1% in the third quarter of 2024. Real GDP increased +2.8% in 2024.
Consumption: +4.2%; GDP Price Index: +2.4%; PCE Price Index: +2.4%; Core PCE Price Index +2.7%.
Disposable personal income: +2.5% vs. +0.2% in the third quarter of 2024.
Personal savings rate as a percentage of disposable income: 3.8% vs. 4.1% in the third quarter 2024.
Housing Market4: Existing-home waned -4.9% (month-over-month) from December to a seasonally-adjusted annual rate of 4.08 million in December. Month-over-month sales in the West, South, and Northeast slumped -7.4%, -6.2%, and -5.7%, respectively, while sales in the Midwest were unchanged.
Year-over-year sales advanced +2.0%, up from 4.00 million in January 2024.
Total housing inventory registered 1.18 million units, +3.5% from December, and +16.8% from one year ago (1.01 million units). Unsold inventory sits at a 3.5-month supply at the current sales pace.
The median existing-home price for all housing types was $396,900, +4.8% from January 2024 ($378,600), as prices rose in all four major U.S. regions.
Average commitment rate for a 30-year, conventional, fixed-rate mortgage: 6.76%.
New Home Sales: 657,000 (-10.5% month-over-month).
1 Source: Bureau of Labor Statistics (BLS), U.S. Department of Commerce, Federal Reserve Bank of New York – Survey of Consumer Expectations, and University of Michigan Surveys of Consumers
2 Source: Bureau of Labor Statistics (BLS)
3 Source: Bureau of Economic Analysis (BEA)
4 Source: National Association of Realtors (NAR), U.S. Census Bureau, and The Department of Housing and Urban Development
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