Chief Global Strategist
Evening newspapers, like vinyl records and rotary phones, are fading relics, all victims of the smartphones into which humanity is gradually burying its consciousness. But once, they were a vibrant part of daily life.
Growing up in Dublin in the 1970s and 1980s, there were two evening papers, the Evening Herald and the Evening Press. Sold at every street corner, they would distract commuters from the damp and discomfort of the tight-quartered, smoke-filled upstairs of double-decker buses. The headlines were urgent and gripping but they had a short shelf life. The ink had barely dried on the tabloids before they were reused as wrappers for chips from the local takeout. I can still taste the salt, vinegar and newsprint flavor of the steaming hot chips I consumed as the rain dripped down on the glittering social life of my teenage years.
Despite the demise of evening papers, the public has retained a fascination with the latest news and, in the case of investing, such an obsession is quite logical. Yesterday’s news should already be priced in. But today’s news, particularly if it affects the outlook in more subtle ways, may still provide some useful information.
The Latest News on Growth
The latest news on American consumers is mixed. On the positive side, light-vehicle sales in March were relatively strong at 16.3 million units annualized. In addition, spending on upper-end services, proxied by the volume of airline travel and restaurant bookings, remains robust. All of this is being supported by the strong stock market gains of recent years.
On the negative side, the boost from income tax refunds is a good deal lower, so far, than we anticipated entering the income tax filing season. As of last week, with over 60% of returns processed, the average refund is up just $350 from a year ago, despite numerous back-dated tax breaks in the OBBBA. While this number should rise in the weeks ahead, many families likely feel that what they are gaining from higher refunds, they are paying out in higher gas prices. Also, while the President’s so-called “tariff rebate checks” are still possible, they are made less likely by the Supreme Court’s striking down of IEEPA tariffs and the additional budget expense of funding the Iran war.
Consumer sentiment has also fallen further to a record low, according to the University of Michigan’s advance report from last Friday. That being said, a fall in consumer sentiment has never been a reliable predictor of actual consumer behavior and we expect real consumer spending to continue to grow, albeit slowly, rising by 0.8% over the course of this year and 1.7% over the course of 2027.
Turning to housing, government data continue to lag badly, with the latest numbers on housing starts and new home sales describing January activity. However, existing home sales, as compiled by the National Association of Realtors and the housing market index, as published by the National Association of Home Builders, are more recent and both show a relatively stagnant market. Weak demographics are contributing to rising rental vacancy rates while still high prices and sticky mortgage rates continue to make home-buying very unaffordable for younger buyers. It should be noted, that flat home prices, combined with slow but steady increases in per capita income, are gradually alleviating the affordability problem. However, this is a slow process and we don’t expect home-building to be a significant driver of economic growth either this year or next.
Capital spending, conversely, should continue to be a source of strength. Commercial construction, outside of data centers looked weak going into this year. However, energy infrastructure spending will likely increase in response to the higher oil prices caused by the Iran war. Meanwhile, “hyper-scaler” spending on AI infrastructure should continue at a fevered pace – mega-cap tech companies continue to see AI as both an existential opportunity if they win the AI race and an existential threat if they lose it. Further evidence of this was provided by last Friday’s February manufacturing order’s report which showed the nominal value of shipments of non-defense capital goods rising at a 9% annualized pace so far this quarter. It should be noted, however, that fast-rising capital goods prices make this number less impressive in real terms.
Inventory accumulation could add to GDP volatility over the next year, reflecting the supply-side disruptions of tariffs and the Iran war. However, more generally, the increased cost of buying inventories, due to tariffs, and of holding them, with more normal interest rates following years of super-low rates, should cause inventories to be a slight drag on growth going forward.
International trade is unlikely to impact growth in a meaningful way over the next two years after a modest decline in the trade deficit in 2025, while cutbacks in federal non-defense spending will likely be offset by increased military spending to rebuild munitions stockpiles. All told, it looks like real economic growth could average between 1.5% and 2.0% in both 2026 and 2027.
The Latest News on Jobs
The March jobs report, released ten days ago, showed a stronger-than-expected payroll gain of 178,000 and a decline in unemployment from 4.4% to 4.3%. However, the rest of the numbers confirmed a picture of very little job growth or inflation pressures emanating from the labor market.
The payroll survey included a downward revision of 7,000 to the prior two months combined. In addition, the strongest parts of the report reflected either good weather (with construction employment rising by 26,000 in March), or a lack of strike activity, (with no major strikes in March compared to 32,000 involved in major strikes during the February survey week).
Wage growth was weak with just a 0.2% month over month gain in average hourly earnings cutting the year-over-year increase from 3.8% to 3.5% - the lowest year-over-year gain since May 2021.
Meanwhile, the fall in the unemployment rate only occurred because a 396,000 monthly decline in labor force overwhelmed a 69,000 monthly decline in employment as measured by the household survey. The labor force participation rate fell from 62.05% in February to 61.88% in March – its lowest level since October 2021. This partly reflects a 318,000 year-over-year decline in the foreign-born work force. On a year-over-year basis, total jobs are up by just 0.16% according to the payroll survey while the total number of workers, as measured by the household survey, has fallen by 0.40%.
Other indicators from the start of this month paint a similar picture, with month-over-month declines in job openings, hiring and quits according to the JOLTS survey and weak readings on “jobs plentiful” versus “hard to get” in the Conference Board survey. Weekly unemployment claims continue to run at low levels although the JOLTS survey showed an increase in layoffs in February and Challenger layoff announcements rose in March with more mentions of AI as the cause.
Overall, this still looks like a low-hire, low-fire labor market and, while good workers are hard to find, dispirited workers are not demanding wage increases, limiting any risk of an inflation impulse emanating from the labor market.
The Latest News on Inflation
Speaking of inflation, last Friday’s CPI report for March showed a very significant 0.9% spike in consumer prices overall, led by a 10.9% jump in energy prices. This boosted the year-over-year CPI inflation rate to 3.3% from 2.4% in February. The latest news from the Middle East is not good, with talks between the U.S. and Iran breaking down over the weekend and the President threatening to blockade the Strait of Hormuz. This will presumably extend the shortage of oil exiting the Persian Gulf leading to further energy price increases. Even at current oil price levels, we expect CPI inflation to rise to close to 4.0% year-over-year by this summer.
However, thereafter, inflation should begin to fade.
The most important reason for this is just the strategic reality of the Iran conflict. The end game in the Persian Gulf is likely to be one in which Iran and the United States engage in further long negotiations about their nuclear program but the Strait of Hormuz is reopened under some agreement by which oil from both Iran and other Gulf nations is able to go through the Strait. Every day that the Strait is closed increases the economic damage to the global and U.S. economies and the U.S. administration will be under tremendous pressure to find a way to reopen it.
In addition, the inflation impact of tariffs is receding. Customs duties collected fell by 20% between January and March reflecting the striking down of the IEEPA tariffs in late February and their only partial replacement by blanket 10% tariffs. These 10% tariffs, (which the administration said would be raised to 15% but currently remain at 10%), can last a maximum of 150 days and the administration has vowed to replace them with tariffs that will raise as much revenue as the IEEPA tariffs. However, given the potential political consequences of higher inflation, it is likely that the administration will settle for milder tariffs, thereby reducing inflation pressures.
Finally, a third of CPI is comprised of actual rents and owners’ equivalent rent both of which are calculated from a smoothed and lagged series of rents paid by renters. As of March, measured rental costs were up 2.6% year-over-year while owners’ equivalent rent was up 3.1%. However, we know from industry surveys that rents on new leases are rising much more slowly than either of these numbers and, with rising rental vacancy rates, this trend should continue into 2027. As a result, we expect year-over-year CPI inflation to fall back below 2% by March of next year and stay close to 2% for the rest of 2027.
In Other News
In other news, the earnings season starts in earnest this week with 28 of the S&P500 companies reporting their first-quarter numbers. Analyst estimates, compiled by FactSet, point to a 12.6% year-over-year gain in operating EPS, a number that is almost certain to improve in the weeks ahead. While information technology and materials will lead the pack in earnings gains, it is remarkable how U.S. companies in general have been able to expand their margins even as consumers remain deeply pessimistic and workers hesitate to ask for wage increases.
Various Fed officials will be speaking this week but they are unlikely to indicate any change in monetary policy at the next FOMC meeting on April 29th. Broadly, we expect the Fed to continue to defend its independence aggressively and only ease when it perceives that the economy is threatened by recession or that inflation is trending below 2%. This suggests no rate cut until the end of this year, although further rate cuts could be forthcoming in 2027 if both growth and inflation fall below 2%.
The Iran war is clearly a negative for the global economy with the global composite PMI falling sharply from 53.3 in February to 51.0 in March. The war is also adding to global inflation. Common sense suggests that global central banks should look through this and not hike rates in an environment of sluggish demand. However, over the next year, the Federal Reserve still looks more likely to cut rates than the Bank of England, the European Central Bank or the Bank of Japan and this, combined with sluggish U.S. growth, could lead to a resumption of the dollar slide.
For investors, this remains a complicated environment, dominated by uncertainty emanating from Washington and the Middle East. So far, the U.S. economy continues to appear capable of producing strong profit growth and low inflation, giving a green light to continued investment in U.S. stocks and bonds while cheaper valuations overseas and the prospect of a weaker dollar bolster the case for increased international equity allocations. However, markets remain vulnerable to geopolitical shocks, underscoring the importance of diversification and under-weighting the frothiest parts of global financial markets.