March 11, 2025

QuickTakes

Will Trump Tariff Turmoil Dim

The Economy's Lights?

The stock market was whipsawed today by geopolitical developments. Stocks fell this morning when President Donald Trump announced a 50% tariff on Canadian steel and aluminum. They then recovered after Ukraine agreed to a US-proposed ceasefire deal (pending Russia's acceptance). Incremental progress on a tariff-avoiding deal between the US and Canada late in the day provided an additional boost. But stock prices still closed down a bit for the day.

Investors are worrying about the adverse macroeconomic consequences of all this geopolitical turmoil. The uncertainty associated with rapid-fire tariff announcements from the White House could weigh on the economy. The NFIB survey of small business owners includes an uncertainty index, which rose to a new record high of 110 during October (chart). After the November 5 elections, it fell down to 86 in December and then rebounded to 104 in February.

Uncertainty typically increases in advance of a presidential election then decreases once the new president's policy goals are clearer. If uncertainty lingers, then consumers may pull back on spending and companies might be reluctant to invest, ultimately hurting the jobs market. The stock market is increasingly discounting this scenario, pushing the Nasdaq into correction territory with the S&P 500 heading in the same direction (chart).

Consumers are getting anxious. According to the New York Fed's February consumer survey, more households were expecting their financial situation to deteriorate over the coming year (chart). Following the November election, they were the most optimistic about their financial situations since just before the pandemic. Positive financial expectations tend to inversely track consumers' inflation expectations, which are creeping higher probably reflecting the likelihood that tariffs will raise prices.

We are still betting on the resilience of the US economy, but we've clearly warned that prolonged tariff turmoil could dim the economic outlook and cause a bear market in stocks. For now, the labor market still looks to be in good shape, which will continue so long as US companies are able to continue growing their earnings and feel confident enough to invest. The percentage of small business owners saying its a good time to expand remains elevated, but near-term capital spending plans dropped sharply last month (chart).

JOLTS data for January are especially stale considering that the impact of DOGE won't show up until February and March data are released. The latest report showed that hiring, quits, layoffs, and job openings are plateauing at healthy levels (chart). However, federal government layoffs undoubtedly will be rising in coming months.

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