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Introduction to U.S. Economic Outlook

U.S. consumers are becoming increasingly pessimistic as the President of the United States signals that a recession is likely. Market probabilities of a U.S. recession are climbing, with key economic indicators reflecting growing concerns. For instance, five-year U.S. treasuries are now pricing in a 52% chance of a recession within the next year, up from 45% in November. The Russell 2000 Index indicates a 48% chance of recession, while the S&P 500 shows a 22% likelihood. Base metals are also showing a 52% probability of an economic downturn. According to a recent JP Morgan report, the chance of a recession has risen to 40% from 30% at the start of the year, citing concerns that U.S. policy is "tilting away from growth."

Consumer Sentiment and Inflation Expectations

The U.S. Consumer Sentiment Index dropped to a near two-and-a-half-year low in March, with inflation expectations rising. The University of Michigan's latest data shows that consumer sentiment fell by 11% in March, reaching 57.9. This marks the third consecutive month of decline, with drops observed across all demographic groups, including age, education, income, wealth, political affiliation, and geographic regions. Furthermore, long-term inflation expectations increased to 3.9% in March, up from 3.5% in February, reflecting growing concerns about future economic conditions.

President Trump’s Economic Forecast and Policy Stance

President Trump has publicly acknowledged the likelihood of a recession, although he refers to it as "short-term pain." He attributes potential economic difficulties to trade tensions and global uncertainties. His statements align with his characterization of the situation as a "period of transition," echoing past Federal Reserve assurances regarding "transitory inflation." Current economic indicators, however, suggest that a recession may be imminent. Key data points include a cooling labor market, significant job losses, and rising numbers of underemployed Americans. These developments are consistent with broader signs of economic slowdown.

Eggs, Oil, and Home Prices: A Dramatic Surge in Costs

In just the last four years, the price of eggs has soared from $1.50 in June 2020 to over $3.65 today, marking a 140% increase. Similarly, oil prices have risen from about $37 to over $75, a 100% jump, while home prices have surged from $320,000 to $420,000, a 30% rise. This has contributed to one of the largest inflation spikes in the U.S. since the 1970s, leading to significant wealth destruction. Although inflation has since dropped to 2.9%, many are concerned as it seems to be stuck at these levels, with recent signs of it starting to rise again.

ISM Services Prices Paid Index: A Key Indicator of Inflation

One indicator suggesting inflation might be on the rise is the ISM Services Prices Paid Index, which tracks the fluctuation of business costs—an important factor in driving inflation. A high reading on this index means businesses are facing higher costs, while a low reading suggests costs are declining. This index has historically been a reliable predictor of inflation. When compared to the U.S. inflation rate, with a three-month delay, the correlation is clear: as business costs rise, companies tend to raise their prices, contributing to overall inflation. For instance, the ISM Services Prices Paid Index spiked three months before the inflation surge in 2021 and accurately predicted the decline in inflation in 2022.

Wages as a Major Driver of Rising Business Costs

Now, in 2025, this index is once again climbing, which could signal inflation may rise again in the next few months. Upon closer examination, one of the primary drivers behind the ISM Services Prices Paid Index is wages. Since the pandemic in 2020, wage growth has seen a significant increase, reaching its highest levels in 25 years.

Wage Growth and Persistent Inflationary Pressures

At one point, wage growth remained relatively high compared to the past decade, contributing to the persistent inflationary pressures we're experiencing. However, the broader trend indicates that wage growth has been steadily declining since its peak in August 2022, and there are signs this trend is likely to continue. This can be observed by overlaying the job openings chart with wage growth and shifting the job openings chart forward by about a year. Historically, job openings have been a strong predictor of future wage growth. The reason for this relationship is that when there are plenty of job openings, workers feel confident in finding new jobs and are more inclined to negotiate higher wages. But when job openings decrease, workers tend to prioritize job security, which puts less upward pressure on wages.

Job Openings as a Predictor of Wage Growth

Looking at the job openings data in the U.S., we see a steady decline since its peak in March 2022, suggesting that wage growth is likely to continue its downward trend. If wage growth continues to fall, it would put downward pressure on inflation. However, there is an important caveat: if we replace the wage growth chart with the FED funds rate, we can see that the Federal Reserve began raising interest rates in March 2022. This marked the point when the job market began to cool down because higher rates increased borrowing costs for businesses, slowing economic activity. In 2021, businesses could easily secure loans at near-zero interest rates to expand and hire new employees, but by 2022, these opportunities dried up as borrowing became more expensive and less accessible.

The FED’s Role in Managing Inflation and Job Openings

The risk today is that if the FED cuts interest rates too quickly, businesses may resume ramping up hiring, leading to more job openings and higher wage demands, which could reverse efforts to reduce inflation. However, the FED likely understands these risks and has recently adjusted its outlook on interest rates. Back in September 2024, the FED projected six rate cuts for 2025, but in the latest meeting, Powell indicated that only one rate cut is expected in 2025. This shift likely reflects growing concerns over inflation. Even if the FED keeps rates stable at elevated levels, it could help maintain a lid on job openings, similar to the period from May to August of 2008, when the FED held rates steady while job openings continued to decline. A similar scenario could play out today, which would keep downward pressure on wage growth and help curb inflation.

Supercore Inflation: A Clearer Picture of Inflationary Trends

This downward pressure on inflation can also be observed through a metric called supercore inflation, which tracks price changes in services while excluding more volatile components like energy, food, and shelter. This measure is particularly useful as it focuses on the most stable and labor-driven parts of the economy, offering a clearer view of underlying price pressures. By narrowing its scope, supercore inflation helps the Federal Reserve assess wage growth and demand-driven inflation more effectively when shaping monetary policy. This is what the chart of supercore inflation looked like in early 2024.

Supercore Inflation and Rising Inflationary Pressures

Supercore inflation indicated a significant increase in inflationary pressures. For example, the March 2024 reading showed a 5% rise, which is notably high compared to the past decade. This suggested persistent inflation, highlighting that inflation was particularly stubborn at that time. However, since then, supercore inflation has cooled down, dropping to around 2%. For now, this doesn't indicate a sustained wave of inflation, but the outlook remains uncertain. While inflation has been cooling over the past couple of years, there's no guarantee this trend will continue.

The Impact of Tariffs on Inflation

A key factor that could potentially reverse this cooling trend is Donald Trump's tariffs. Tariffs can drive inflation higher by increasing the cost of imported goods. When this happens, businesses often pass at least part of these increased costs onto consumers through price hikes, contributing to inflation. There is some debate among economists regarding the connection between tariffs and inflation. Some argue that tariffs only lead to one-time price hikes, not sustained inflation. Inflation remained stable during the series of tariffs in Trump's first term, but the situation has evolved. Trump doubled tariffs on Chinese imports to 20%, and he's repeatedly delayed the implementation of 25% tariffs on Mexican and Canadian imports, which could take effect soon. This uncertainty is already impacting inflation expectations.

Rising Inflation Expectations and Market Concerns

A key metric, the one-year inflation expectations, tracks what people anticipate will happen to prices over the next year. The latest data shows a significant jump from 3.3% to 4.3%, one of the largest increases in the past decade, indicating that inflation is becoming a major concern again. Despite signs of cooling inflation, such as falling wage growth and declining supercore inflation, people are still worried about the near-term inflation outlook, largely due to the uncertainty surrounding tariffs. If inflation expectations continue to rise and inflation indeed increases, the Federal Reserve may be forced to respond more aggressively. However, it's also possible that this is just another temporary spike, similar to the surges seen in April and October of 2023, which were followed by a reversal.

Labor Market Trends and Economic Slowdown

The U.S. labor market is showing signs of weakening. In the most recent reporting period, 588,000 Americans lost their jobs, marking the second-highest drop since the 2020 pandemic. Additionally, the number of Americans working part-time while seeking full-time employment rose by 460,000 in February, reaching 4.9 million—the highest number since May 2021. Over the last two and a half years, the number of underemployed individuals has increased by 1.3 million. These trends indicate a significant slowdown in the labor market, contributing to broader concerns about economic contraction.

U.S. Economic Growth and Federal Reserve Projections

Economic growth in the United States is slowing, with the Federal Reserve Bank of Atlanta's daily tracking estimate of real GDP growth for the first quarter showing a negative -2.4%. The forecast is expected to worsen into the second quarter. This data, along with declining consumer confidence since the end of 2024, paints a picture of ongoing economic deterioration. Despite optimistic rhetoric in recent political speeches, the reality on the ground reflects a significant and sustained downturn in economic activity.

Impact of Trade Policies on Economic Stability

One significant driver of economic uncertainty is the U.S. administration’s fluctuating trade policies. Frequent changes to tariffs and trade agreements, particularly with key international trading partners, have created instability in the market. While these policies may serve as strategic political moves, their inconsistency undermines business confidence. Companies are less likely to invest in expansion, growth, or hiring when faced with such volatility, leading to increased fears of a recession. The Trump administration's erratic approach to trade policy is contributing to heightened market volatility.

Immigration Policy and Economic Consequences

The Trump administration’s immigration policy also plays a crucial role in the current economic situation. Estimates suggest that mass deportations could cost the U.S. economy between $315 billion and $968 billion over a decade. In addition, Immigration and Customs Enforcement (ICE) is facing a $2 billion shortfall for the current fiscal year, exacerbated by efforts to enforce stricter immigration policies. These measures increase government spending, fuel inflation, and further tighten the labor market, which may have long-term negative economic consequences.

Conclusion and Summary of Economic Outlook

In conclusion, despite some signs that inflation may be trending downward, the U.S. economy is on track for a major downturn, with multiple economic indicators flashing red. The combination of declining consumer sentiment, rising unemployment, and slow GDP growth points toward the likelihood of a recession. The factors driving this downturn include both domestic policies and external economic pressures. The situation requires careful monitoring, especially regarding the impact of trade policies and immigration measures on the broader economy. Further analysis of the U.S. national debt and budget deficits will be explored in future discussions.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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