The US economy is in good condition, with strong growth with low unemployment rates in recent quarters.
However, warning signs are flashing, sliding the market amid policy uncertainty and some troubling macroeconomic indicators.
Let's take a look at the risk factors facing the US economy today.
Inflation risk
After the pandemic's aftermath rose by 9%, inflation had sunk almost back to the Federal Reserve target rate of 2% by mid-last year.
However, it began to rise again until the fourth quarter, with the Consumer Price Index (CPI) rising 3% in January, urging President Trump to declare “inflation is back.”
The February CPI broke this trend on Wednesday, returning to a 2.8% rise, with many economists sighing at ease. The personal consumption cost (PCE) price index has also returned to the latest reading, relaxing from 2.6% in December to 2.5% in January.
“Today's more benign CPI readings are welcome news, but primarily the ability to slow down inflation components and unstable prices,” says Skanda Amarnath, director of Employ America, a think tank and advocacy organization.
Price rises remain the biggest concern for consumers in polls.
“Inflation has eased considerably from the mid-2022 highs, but prices remain the biggest concern for consumers,” analysts at the morning consultation concluded in a report on Wednesday.
The University of Michigan Consumer Sentiment Survey showed that inflation expectations for the previous year rose significantly between January and February, bounced full percentage points to 4.3%.
Americans are fastening their belts
According to the Commerce Department's Personal Consumption Expense Scale, consumer spending plummeted in January, receding by 0.2% or $30.7 billion. It was almost two years since I was immersed in negativity.
In addition to hoping for higher prices, households are also becoming increasingly pessimistic about their financial outlook. According to a New York Fed's survey on consumer expectations, the percentage of households that believe their financial situation will worsen this year has risen to 27.4%, the highest level since November 2023.
Consumer anxiety coincides with business sentiment. The National Federation of Independent Business reported this week that only 12% of small businesses thought it was a good time to expand in February. It marks the largest monthly decline since 2020, marking the 5 points decrease from January.
The Atlanta Federal Government's first quarter Gross Domestic Product (GDP) forecast was in negative territory, but this is a statistical anomaly caused by a surge in gold imports, prompted by the fear of tariffs, and is not symbolized by the final GDP calculation.
“It's mainly about the surge in gold imports in anticipation of Trump's tariffs, which is ruining the Atlanta model that is usually useful,” economist Paul Krugman wrote in the commentary.
Krugman dismissed fears about the imminent recession as “premature,” but a CEO's investigation last October by the PWC believed there would be a recession in the next six months.
Tariffs and whipping trade policy
President Trump has issued a surge in tariff orders and retreats from those orders.
After pledging 25% tariffs in Canada and Mexico on January 20th, Trump began the order in February and again ordered it in March. Import taxes came into effect for several days before Trump exempts carmakers from them, and then suspended them for all goods covered by existing trade contracts.
This week, Canada responded to three US states by charging additional charges for electricity imports, urging Trump to propose a 50% tariff on Canadian metals. Both countries have returned new orders.
Trump left a 20% tariff on China's imports, leading China to retaliate with two tariffs on US energy products, agricultural machinery and other goods. He canceled the duties and inspection exemptions for items under $800, but it piled up a large number of packages at US ports of entry, and Trump cancelled the cancellation a few days later.
Analysts at Deutsche Bank said Wednesday that “increasing evidence suggesting the Trump administration is considering a major reset to a global trade architecture.”
They add that it may help address the imbalance between labor and capital in the United States, warning that the ultimate impact on the US economy will remain “uncertain.”
While tariffs are rarely shown in economic data, they certainly have an impact on the business environment.
“The business community is always hoping for lower tariffs anywhere in the world. At this point, there is some uncertainty. Goldman Sachs CEO David Solomon said on Wednesday on Fox Business Network's “Morning with Maria” cable TV show.
The market continues to decline
The market rose and fell on Wednesday, feeling a mitigation in CPI count, but it has reduced its value in recent weeks amidst uncertainty in policy and macroeconomics.
The high-tech Nasdaq fell by around 10% last month. The Dow Jones industrial average has dropped by about 7%. The S&P 500 has dropped by about 7%, while the Russell 2000's minority index has dropped by almost 10%.
Many analysts attribute market losses to Trump's tariffs.
“The uncertainty associated with President Trump's tariff plans is causing disruption in financial markets,” the Beacon Policy Advisor wrote in an analysis Wednesday. “There are still limitations to the pain Trump is willing to inflict, but the lesson from the start of the administration is that it is more than previously expected.”
Fed response
The Fed suspended interest rate cuts in January after it was found to be persisting in the fall. Many analysts believe Wednesday's inflation moratorium on CPI is not enough for central banks to resume.
“In itself, today's inflation data probably won't be as good enough to allow the Fed to cut fees at upcoming March meetings. Morningstar economist Preston Caldwell wrote Wednesday, Morningstar economist Preston Caldwell wrote.
The economy may still be handling the trillions of stimuli that have emerged over the course of the pandemic in the form of loans, grants and checks.
As the Fed reopens its cut rates early and growth levels drop amidst the backdrop of declining consumer spending, the economy could experience a scary combination of inflation and stagnation.
