The economy could experience a short-term growth scare | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

Over the past several weeks, data has started to pile up, indicating that economic growth is stalling.

Poor guidance from Walmart, a weak U.S. retail sales report, disappointing consumer confidence data, poor news from the housing sector, a sizable decline in new orders within the ISM Manufacturing report, and growing uncertainty from CEOs and CFOs on recent conference calls are all signs that point to a slowdown.

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Investors shouldn’t discount the risk of a recession, especially given that stocks have delivered back-to-back years of 20% plus gains that have arguably lifted them to sky-high valuations.

The economy could experience a slowdown in 2025.

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GDP data isn’t encouraging

Last quarter, the U.S. GDP registered 2.3% while final sales, which measures domestic demand (note: it takes out the impact of inventories, trade, and government spending), grew at a healthy 3.0% rate.

However, signs so far suggest growth this quarter may come in much lower. According to the widely watched Atlanta Fed GDP report, which provides a timely forecast of the current quarter’s GDP, growth this quarter (as of March 3, 2025) is currently forecast at a very weak negative 2.8%.

If so, that would represent the worst reading since the second quarter of 2020, when GDP registered minus 28.1% due to the impact of COVID on the economy.

What is causing the economic weakness?

Uncertainty about taxes, tariffs, DOGE, and immigration (e.g., Trump 2.0) are at the top of the list, along with concerns about geopolitics, deregulation, Fed policy, and inflation.

Following the election of Donald Trump last November, there was a sense that animal spirits were starting to build in financial markets and that the outlook for 2025 would be quite positive.

While there are certainly a number of positives you can still point to (i.e., rising corporate profits, a historically low unemployment rate, a focus on deregulation, the likelihood that current tax policy gets extended, etc…), rapid policy changes by the new administration are leading to increased uncertainty which is not good for the economy or financial markets.

Consumers are in a tight spot

Historically (several decades ago), manufacturing was a larger part of the U.S. economy. However, over the years, the services side of the economy has grown, representing about two-thirds of the overall economy today.

Last week, we got the latest consumer income and spending reports on the economy from the Bureau of Economic Analysis (BEA).

Two things stood out:

Income grew 0.9% in January, while spending increased just 0.2% last month.
The U.S. savings rate declined to just 4.6% (versus a 10-year average of 7.0%).

Turning to jobs data, overall, the U.S. unemployment rate remains historically low at 4.0%, which is a positive sign for the labor markets and the U.S. consumer. However, there are growing signs that things may be starting to change.

Weekly jobless claims rose 22,000 to 242,000 last week (note: a rise over 250,000 would start to get the market attention). The ADP Monthly Payrolls report came out on March 5th and registered just 77,000 new jobs created versus a revised 186,000 last month (and about half of what the markets were looking for). Also, monthly data from the Conference Board indicates that consumers believe getting jobs is getting harder.

A housing market still in turmoil

Turning to the housing market, data has been quite weak over the past several months as the impact of high mortgage rates takes its toll.

For example, last month, housing starts (historically a leading indicator for the economy) declined 9.8% month over month. Looking back, housing starts data has now declined in 6 of the past 10 months.

Furthermore, the NAHB Wells Fargo Housing Index declined 5 points last month from 47 to 42 (versus a 10-year average of 62). A reading above 50 indicates expansion, while a reading below 50 shows a slowdown. Thus, home builders remain downbeat about the housing market.

Tariffs impact on the economy

When President Trump ran for re-election, he talked about raising taxes to help offset what he called an unfair playing field. It was unclear whether all of the speeches he gave during election season were to be taken seriously or were just meant to help him get elected. Well, fast-forward a few weeks into his new presidency, and it is evident that higher tariffs are a real and important part of his economic policy.

First, Trump has turned his sights on our two largest trading partners, Canada and Mexico.

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For reference, Mexico exported roughly $505 billion to the U.S. last year, representing about 30% of that country’s GDP, and Canada exported over $412 billion, or about 20% of its GDP, to the U.S.

On the other hand, U.S. exports to Canada represented $349 billion last year, or about 1% of the U.S. GDP, while exports to Mexico were $334 billion (also about 1% of the U.S. GDP). So, Mexico and Canada seem to have much more to lose from an extended tariff war.

Most economists (but not President Trump) believe that higher tariffs raise the price of goods and thus represent a tax consumers ultimately pay. There is a growing fear in financial markets that higher tariffs (if in place for an extended period of time) could lead to higher prices, increased inflation, and reduced consumer spending.

Earnings outlooks are getting reset

Due to rising concerns about the economy, inflation, tariffs, and immigration, one question to ask is whether analysts are lowering their EPS estimates more than normal so far in 2025.

Analysts lowered their EPS estimates for the first quarter by 3.5% during the year’s first two months. This is higher than average (for the first two months of the year) when looking back over the past 5, 10, 15, and 20 years, according to FactSet.

Since stocks tend to track the direction of corporate profits over time, it will be important to monitor the outlook for corporate profits as we head through 2025.

Any potential reset in earnings estimates lower could mean a tougher road for stocks.

What to watch now?

When you take a look at all the various moving parts in the economy and Washington right now, the biggest downside risk is a combination of policy uncertainty that may lead to a sudden slowdown in economic growth as consumers and businesses delay purchase decisions.

For example, consumers may pull back on buying things like cars, eating out at restaurants, and taking expensive trips to conserve cash. Similarly, companies may pull back on new capital expenditures and put a freeze on hiring plans to support profit margins.

For investors, watch timely indicators like weekly jobless claims (which come each Thursday morning at 8:30 am), credit spreads (i.e., the yield difference between high-yield bonds and U.S. Treasury Bonds), and the outlook for corporate profits.

How those indicators trend from here will provide useful information on the outlook for the economy that can help you understand what might be next for stocks.