Sentiment Shift…

Little more than two months ago, the US economy was capping yet another banner year.

Economists had practically given up trying to predict the timing of the next recession, with GDP notching back-to-back annual gains of almost 3%. The unemployment rate was ticking lower, after the job market stared down the mid-2024 fears over triggering the “Sahm Rule” recession indicator.

Small business confidence levels were soaring as companies looked forward to a Trump administration implementing an agenda of deregulation and tax cuts. As the calendar turned to 2025, the Federal Reserve Bank of Atlanta’s closely watched GDPNow forecast suggested another quarter of expansion exceeding estimates of longer-term potential.

That was then. In recent days, the zeitgeist has changed dramatically.

The Atlanta Fed’s monitor nosedived Friday, with a massive swing of more than 3 percentage points to augur an outright decline in GDP this quarter. A report on consumer spending showed a drop in January. Earlier in the week, consumer confidence registered the biggest plunge since the summer of 2021, when the inflation surge was getting going.

The Bloomberg Economics team has slashed its GDP forecasts to 0.4% for this quarter and 0.9% next, from 1.5% and 2% previously. On Wall Street, the narrative has shifted from “US exceptionalism” to discussion of recession risks. “Stagflation” has also re-entered the conversation.

There are a lot of asterisks to all this. The tragic fires in the Los Angeles area had an impact on housing and other indicators. Abnormally cold weather (by nowadays standards) has also been a factor.

Imports surged as retailers and wholesalers rushed to get ahead of President Donald Trump’s tariffs — something that will mathematically depress GDP, making it look worse than it really is on a domestic basis.

And there’s the DOGE-driven cutbacks to federal payrolls and the broader move to freeze a swath of government spending, which is showing up in weekly jobless claims. These are effectively “adjustment costs” of a shift in policies, says Torsten Slok.

“How significant the impact of these policies will be on the economy depends on the magnitude and duration of each policy,” Slok, chief economist at Apollo Global Management, wrote in a note Saturday.

Treasury Secretary Scott Bessent says the administration is recalibrating the economy so that growth is led by the private sector, not government spending. Inflation will come down as Trump’s agenda of deregulation, energy expansion and permanent tax cuts takes hold, he said in an interview on Bloomberg TV Friday. 

Now the Big Question…

Does this mean the stock market is going to go down or up? The Big Money Crowd believe in the tax cuts and the de-regulation moves. Traditional economists see trouble ahead. We are going try and thread the needle and say that the market currently is trending down on intermediate measures but retains very risk oriented positioning from a macro perspective. The S&P is till where everyone is hiding.

We will stay in touch.