3/28/25: Policy Uncertainty, Consumer Retrenchment, and Slowing Job Growth

The elevated level of policy uncertainty emanating from the new administration is taking its toll on the current valuation of risk assets with US domiciled broad equity indices generating negative total returns on a year-to-date basis. Consumers appear to be retrenching with the personal savings rate increasing to 4.6% as of February 2025 compared to the December 2024 level of 3.3%. Additionally, some of the survey-based data is also indicating consumers are alarmed; notably, the Consumer Confidence Index dipping down to 92.9 as of March 2025, the lowest reading since January of 2021 (87.1). The above trend GDP growth the US economy experienced in 2024 was driven by the strength of the consumer partially correlated with the solid employment backdrop. Although coincident indicators of the employment market remain sound, with weekly jobless claims averaging 224k over the past four weeks, next Friday the March employment report will be released with the Bloomberg consensus estimate for nonfarm payrolls currently at 140k. Assuming no adjustments to the payrolls number in January or February of 2025, the three month moving average on job growth would move down to 139k, a material deceleration from the December 2024 three month moving average of 209k.

The economic data released this morning did little to provide further clarity on the direction of monetary policy between now and September 2025. Personal Income surprised to the upside, coming in at 0.8% month-over-month compared to the consensus estimate of 0.4%. Personal Spending surprised marginally to the downside at 0.4% month-over-month compared to the consensus estimate of 0.5%. In the second half of 2024, excluding the month of October, Personal Spending was higher than Personal Income on a monthly basis. However, through the first two months of 2025 the trend has reversed, with spending coming in lower than income, impacting the growth outlook in 2025 in Chandler’s view. The inflation data released this morning came in a little hot, with Core PCE on a month-over-month basis printing at 0.4% and 2.8% year-over-year. Over the past 12 months Core PCE annualized inflation has been ‘stuck’ in a range of 2.6% to 3.0%, comfortably above the Federal Reserve’s 2.0% policy objective and disconcertingly not trending lower of late. The Chandler team has a longer-term outlook for Core PCE inflation to trend towards 0.2% on a monthly basis, however for the time being this is proving to be elusive.

The spread between the two-year and ten-year Treasury notes has been moving wider on a month-to-date basis, currently close to 35 basis points compared to 22 basis points as of the end of February. The Chandler team expects the normalization to continue and ultimately we expect the additional steepness of the Treasury yield curve to be led by shorter term rates moving lower over time. The view on the steeper curve implies monetary policy will be supportive. The Chandler team is forecasting an adjustment lower in the Fed Funds rate in our six-month forecast horizon with a high probability of two rate cuts in 2025 correlated with the softer consumer spending outlook and a weaker employment backdrop compared to 2024.