The U.S. economy could face the risk of a sharp slowdown over the coming months as the tariff threats, federal workforce cuts and immigration policies of President Donald Trump upend the country's extraordinary post-pandemic gains.
Stocks, which have performed reasonably into the latter part of the month, erased their year-to-date gains on Thursday following a 1.58% slump that suggests cracks are beginning to form in the current bull market as the broader impact of Trump's economic agenda begins to take shape.
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Consumer confidence fell the most since summer 2021 this month, according to the Conference Board's benchmark sentiment survey published earlier this week, as participants cited inflation, employment and tariff concerns, and "comments on the current Administration and its policies dominated the responses.”
The University of Michigan's February consumer sentiment survey, which carries a bias from Democratic-leaning states, fell to the lowest levels since 2008.
Meanwhile, the St. Louis Federal Reserve's Economic Policy Uncertainty index, which tracks media and analysts' coverage of the economy, is trending at the highest levels since the global financial crisis.
Trump added to that uncertainty on Thursday, posting on his Truth Social website that new 25% tariffs on goods from Canada and Mexico, which he'd hinted yesterday could be delayed, will be imposed as of March 4, as well as an additional 10% levy on goods from China.
The Labor Department also reported a big jump in weekly jobless claims, with 242,000 Americans filing for unemployment benefits.
That tally doesn't completely capture the full weight of federal workforce firings under the president's Doge effort, as those employees are calculated through a separate compensation program.
Claims for jobless benefits are rising
"Today’s jobless claims surprise will dial up anticipation for next week’s employment data, but it remains to be seen whether the increase is just an outlier or the beginning of a trend," said Chris Larkin, managing director for trading and investing at E-Trade From Morgan Stanley.
"Despite recent concerns about the strength of the U.S. consumer, most numbers continue to point to a U.S. economy that may have softened but is still on solid ground," he added. "That said, this morning’s initial reaction to the Trump administration’s plan to follow through with tariffs on Mexico, Canada, and China suggests the market continues to be susceptible to policy uncertainty."
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U.S. stocks continue to lag their European peers as investors pare riskier bets in the wake of Trump's inauguration and plough money into overseas stocks amid what Bank of America research has called a "historic" overvaluation for the S&P 500.
The benchmark is now down 2.5% for February in fact, with the more volatile Nasdaq down 4.1% amid both broader market uncertainty and the underperformance of the Magnificent 7 megacap tech stocks.
Growth so far, however, has held up well, with solid momentum from a 2.3% rise over fourth quarter 2024, based on the Commerce Department's reading, keeping the current-quarter estimate at the same rate, according to the Atlanta Fed's GDPNow forecasting tool.
Downside surprises in economic data
However, recent data releases have been surprising to the downside, most notably in the form of S&P Global's February PMI report, which showedthe domestic services sector, the biggest economic driver, falling below the 50-point mark, which separates growth from contraction.
January housing starts were also in a funk, with single-family construction falling 8.4% to a weaker-than-expected annual rate of 993,000 units. Homebuilder sentiment in February slumped to the lowest level in five months.
"While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent [Housing Market Index]," said Carl Harris, chairman of the National Association of Home Builders.
Related: Retail sales tumble in January, testing Fed rate cut forecast
Inflation readings, meanwhile, are ticking higher. January's consumer price inflation index rose to 3.1% and the PCE Price index is likely to show pressures holding well above the Federal Reserve's 2% target.
"The latest economic data on the labor market, the housing sector and retail spending trends point to softening economic momentum at the start of the year,” said EY Senior Economist Lydia Boussour.
Adding federal job cuts into the mix, which are expected to total around 500,000 over the coming months, as well as the impact of higher prices on tariffed goods from virtually every major economy in the world, makes near-term prospects vulnerable.
Recession risks? Not yet, but...
Mark Malek, chief investment officer at Siebert Financial, cites the Conference Board's headline reading of 79.2 and notes that numbers below 80 are generally associated with a recession in worrying about the broader implications of the federal government overhaul.
"Am I pulling the alarm saying that we are going to have a recession?," he asked. "No, by no means, but I am telling you that every action has a reaction, and to expect that simply firing half a million workers may have more far-reaching, negative impacts than one might assume."
Data releases over the coming weeks, notably the Labor Department's February jobs report, will provide investors with more clarity on the impact of Trump policies.
More Economic Analysis:
- Retail sales tumble in January, testing Fed rate cut forecast
- CPI inflation shock hammers Fed rate cut bets for 2025
- Rate cuts and tariffs will weigh on economic reports
"February’s uptick in jobless claims is likely only the leading edge of Doge’s impact on the job market," said Bill Adams, chief economist for Comerica Bank in Dallas.
"Some employers are likely holding onto workers in hopes that Congress will force the federal government to pay appropriated funds for their employees. Others are imposing hiring freezes that will show indirectly push up claims since jobseekers are having a harder time finding new work," he added.
But the sentiment of at least some consumers has clearly turned for the worse," Adams said.
"Consumers who are worried about tariffs, Doge cuts, and fears of deportations seem to be pulling back on discretionary spending. That will likely be a headwind to consumer spending and economic growth near-term."
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