Downside risks to the US economy are stirring.
Beyond that, the sources of growth have narrowed, and thehousing marketis at a standstill.
The shifting political winds in Washington have also added uncertainty to the outlook.
Based on the inferred probabilities from markets, investors expect to see two cuts from the Fed in 2025.
Any reasonable read of the data points to a clear cooling of the US economy.
And the way that the US arrived at that growth was not especially encouraging.
The case for a slowdown in both categories is strong.
And it’s clear that income growth is easing as the labor markets cool.
And as incomes slow, so will consumption.
But there’s a limit to how much consumers can draw down their savings to fuel buying.
States received huge cash increases during the pandemic years, but those surpluses are rapidly fading.
State and local government construction spending rose 4.4% in 2024, down from 19.7% in 2023.
Hiring by state and local governments is decreasing as well.
This slowing of growth would have serious consequences for Americans.
One clear downside is a likely rise in the number of people out of a job.
One of the most important routes to support the economy is for the Fed to start cutting interest rates.
Making debt cheaper would encourage businesses to invest or hire, while providing some cushion for household balance sheets.
Most of the shortfall in core inflation, relative to the Fed’s target, is in housing.
A month later,Powell seemed to have changed his tune.
In other words, they do guess, speculate, and assume.
Let me address the elephant in the room: Donald Trump.
This is, I think, the source of Powell’s wait-and-see pivot.
But the evidence for a real effect from the president’s policies is weak so far.
Tariffs are not the only dimension of policy.
Obviously, there is enthusiasm, for example, for a lighter-touch approach to financial regulation.
Trump is also not the only source of uncertainty.
That would be a much bigger risk to the economic outlook than the threat of tariffs.
This would be a passive tightening of monetary policy, which has important implications for financial market investors.
I anticipate a decline in longer-term interest rates and a sell-off in equity prices as risk appetite wanes.
For the economy, expect conditions to deteriorate in the job market.
Neil Duttais head of economics at Renaissance Macro Research.
