Fears of Stagflation Return
Recent economic reports have revealed significant cracks in the economy’s resilience.
- January’s housing market index dropped to a five-month low, signaling weakness in the housing sector.
- Housing starts declined, and existing home sales fell, suggesting a slowdown in the real estate market.
- At the same time, S&P Global reported that U.S. service-sector activity entered contraction, with its lowest PMI reading in over two years.
- These reports overshadowed a continued rebound in manufacturing activity, highlighting broader economic concerns.
Analysts are also worried about the impact of the Trump administration’s federal layoffs on the job market.
- These concerns have been amplified by Target’s disappointing results, seen as a bellwether for retail.
- In addition, January’s consumer sentiment index fell to its lowest point since November 2023, reflecting growing unease among households.
- Household inflation expectations surged, driven by fears that tariffs would push prices higher, further pressuring the economy.
President Trump announced plans to impose additional tariffs on automobiles, pharmaceuticals, and lumber products, with rates set at 25% starting April 2nd.
- Transportation and airline stocks were hit hard by these tariff announcements.
- Rising policy uncertainty, combined with growing signs of economic weakness, continued to weigh on the broader market.
The Federal Reserve’s meeting minutes suggested that policymakers were inclined to hold rates steady.
- They cited a “high degree of uncertainty” surrounding the economic outlook.
- Rate committee members expressed concerns about potential inflationary pressures stemming from both the proposed tariffs and strong consumer spending.
However, the recent softness in economic data may push the central bank to reconsider its stance.
- While many analysts warn that one set of data points does not fully reflect the economy’s health, mentions of stagflation — a condition of low growth and high inflation — are becoming more frequent.
- A series of weaker-than-expected data could prompt the Federal Reserve to introduce further monetary support, as a slowdown in consumption may help to curb inflation.