Economic Update

Week of March 31, 2025

NEW THIS WEEK

Growth

The U.S. economy expanded at a healthy 2.4% q/q saar during the fourth quarter, bringing real economic growth to 2.8% y/y in 2024. Consumer spending continued to power the economy forward, growing at an exceptional 4.0%, while government spending moderated. Business fixed investment turned negative due to declines in equipment and intellectual property spending while residential investment rose after lagging for two quarters. Elsewhere, inventories were a large drag on economic activity. While policy uncertainty remains, economic momentum appears solid for now.

Jobs

The February Jobs report showed a labor market that still looks relatively healthy, although some of the details were soft. Nonfarm payrolls rose by 151k, below consensus expectations. Revisions removed just 2k jobs from the prior two months, bringing the three-month moving average of payroll gains down to a still strong 200k. Across sectors, services (+106k) remained the key contributor, although goods producing sector employment (+34k) rose at its fastest pace since 2023. Government employment rose modestly, although federal government employment fell 10k, likely due to the federal hiring freeze. Even as labor force participation fell, the unemployment rate ticked up to 4.1%, while wage growth eased to 0.3% m/m and 4% y/y. Despite some weakness, this report showed a labor market that has remained resilient in the face of uncertainty.

Profits

The 4Q24 earnings season has come to a close. Pro forma EPS came in at $65.77, representing growth of 18.4% y/y and 4.7% q/q. Looking at the three main sources of EPS growth, sales, margins and shares contributed 5.8, 13.6 and -1.0 percentage points, respectively. Earnings continue to broaden out, with the S&P 500 ex-Magnificent 7 earnings rising 15% y/y vs. 31% for the Magnificent 7. Results were solid with 76% of companies beating on earnings and 63% beating on revenue, in-line with 10-year averages. As GDP growth slows and y/y comparisons get tougher, companies' ability to defend their margins should be an increasingly important driver of earnings growth.

Inflation

The February CPI report showed the headline figure increasing by 0.2% m/m (2.8% y/y), below consensus, while core CPI rose 0.2% (3.1%), which was the slowest annual rise since 2021. While the move lower is welcomed, some of the softer details of the report were indicative of weakening consumer demand. For example, recreation commodities and airline fares, segments sensitive to consumer demand, saw prices fall 0.7% m/m and 4.0%, respectively. This report helped to reduce fears of persistent inflation, but more price increases could be on the way as tariff impacts begin to flow through the data.

Rates

At its March meeting, the FOMC voted to leave the federal funds rate unchanged at 4.25%-4.50%. With tariffs top of mind, updated economic projections reflected expectations for slower growth and higher inflation in the near term. Further out, inflation forecasts were largely unchanged, suggesting the Fed expects any inflationary impulse from tariffs to be transitory. The dot plot was left unchanged with two rate cuts still penciled in for 2025. Turning to the balance sheet, the pace of QT was slowed with the Treasury redemption cap lowered from $25bn to $5bn. The MBS cap was left unchanged at $35bn. With elevated uncertainty, the pace of rate cuts will continue to hinge on incoming economic data.

Risks

  • Geopolitical tensions and policy uncertainty, especially regarding tariffs and immigration, may heighten market volatility.
  • A slow-moving economy is more vulnerable to any kind of shock.
  • Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.

Investment Themes

  • Fixed income offers attractive levels of income and protection against an economic downturn.
  • Broadening profit growth should continue to support a more inclusive stock market rally.
  • Powerful structural and cyclical tailwinds should support select international markets.