US: Policy uncertainty spikes. Relentless back and forth on trade, national security, and government operations have raised consumer and business anxiety in the US. Additionally, policy uncertainty has risen substantially. An index of policy uncertainty, calculated by tallying relevant keywords appearing daily on US media, shows the index reading at its second highest in 40 years, the only exception being the early months of the Covid-19 pandemic. During this century, spikes in the index have coincided with recessions which is worrisome.

In a remarkable change in economic momentum over the past two months, the US economy is sputtering. The signs are noisy and could be subject to seasonality, but the fact is the first quarter of 2025 is presently on track to record a contraction over the previous quarter. Atlanta Fed’s real GDP Nowcast model is presently tracking -2.4% growth, annualised, for the quarter, a most striking fall from tracking nearly 4% just a couple of months ago.

The key driver of the contraction is a surge in imports which makes net exports’ contribution of GDP substantially negative. This most likely reflects front-loading of exports ahead of Trump’s tariffs. There are also signs, both from surveys and actual data, of consumption and investment slowing amid rising uncertainty about the policy environment. Public spending is also a source of concern with a range of job rationalisation measures underway under the direction of Elon Musk. Some of the downside in the Atlanta Fed GDP tracker may fade as one-offs disappear, but these are extraordinarily opaque times for the growth outlook.

In his latest speech, Fed Chair Powell displayed little concern with regards to the economy or the need for imminent rate cuts. He acknowledged uncertainty from Trump’s escalating trade war but kept the message on the Fed’s stance clear—the central bank would cut rates only after it is assured of the path towards 2% inflation. If the Fed stays steadfast in its inflation target, a large number of rate cuts in 2025 would be unlikely.

The Fed appears unworried about layoffs in the public sector. Granted, through the end of February, there has been no discernible weakening of labour market indicators with the February unemployment rate steady at 4.1% and wages up 4% y/y. However, consumers have begun postponing purchases as seen by the surprisingly weak January retail sales data. University Michigan’s survey of consumers also shows a sharp deterioration in confidence, while inflation expectations have risen both among consumers and businesses. It remains to be seen how the stagflationary mix of weakening consumer confidence and rising inflation expectations would sustain, but as long as trade war related noise persists, this may well be the making of things to come.

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