By Michael Sheldon

Following the re-election of President Donald Trump last November, there was a growing sense of optimism regarding the outlook for the economy and financial markets in 2025. A pro-business president working on policies that included reduced regulation, lower taxes, energy security, reshoring, and possible peace between Russia and Ukraine all appeared to represent positive tailwinds for financial markets this year. Tariffs were clearly on the agenda, but it appeared that they might be used mainly as a negotiating tool.

Fast forward a few weeks and policies from Trump 2.0 have led to growing confusion and uncertainty among both consumers and businesses. The impact is increasingly showing up in survey data and in the statement associated with the most recent Federal Reserve meeting last week, the Federal Open Market Committee stated that "uncertainty around the economic outlook has increased."

There is an old saying in economics, "watch what I say and not what I do." While sentiment surveys have turned weaker, for now, consumers continue to spend and support moderate growth in the economy. However, if the president's tariff policy continues to create uncertainty, it may not take much for consumer spending to pull back which could lead to a slowdown in the months ahead.

At this pivotal time, it's especially important for financial advisors to keep an eye on economic data. Here I provide an overview of where things stand and then suggest four important indicators advisors should follow.

Consumer strength. To get a better sense of where the economy is truly heading, you need to keep an eye on the U.S. consumer, which represents about two-thirds of the overall U.S. economy. Looking at some of the most recent survey data from the Conference Board Index and the Michigan Sentiment Index is a bit worrisome.

For example, the Conference Board's consumer expectations index from last month declined 9.3 points to a level of 72.9. This is below the recession warning level of 80. Michigan's latest reading for consumer sentiment expectations (a slightly different monthly survey) was also weak when it was released recently and fell a sizable 9.8 points to 54.2, representing the lowest level since July, 2022.

Last month the economy created an additional 151,000 jobs, still positive but down somewhat from the three-year trend of 232,000. Weekly jobless claims remain comfortably below 250,000. Above that level economists start to get a little more concerned.

Real wages (i.e. wages minus the rate of inflation) continue to remain positive, which helps boost consumer buying power.

Over the past ten years, household net worth (i.e. total assets minus total liabilities) has increased by an impressive $79.8 trillion to $169.4 trillion, according to Federal Reserve data. Offsetting that, the household savings rate currently stands at just 4.6% today, down from a 10-year average of 7%.

Business sentiment. In February the monthly National Federation of Independent Business (NFIB) small business survey, which dates back more than 50 years, showed policy uncertainty is at its second highest reading ever.

Recent data on cyclical parts of the economy like housing and autos has been mixed. For example, last week existing home sales rose 4.2% month over month (while down 1.2% year over year) and the National Association of Home Builders (NAHB) Index fell 3 points last month to 39, representing the lowest level in seven months and down 24% year over year.

On the manufacturing side, durable goods orders excluding volatile categories like defense and aircraft have generally been trending higher in recent months, but the monthly Institute for Supply Management's Purchasing Managers' Index ( PMI) declined modestly from 50.9 to 50.3 last month after posting a reading below 50 in 25 of the past 28 months. Note: a reading above 50 indicates expansion while a reading below 50 indicates contraction.

Over the past few weeks, we have started to hear weaker guidance from a growing number of companies across different industries. Some examples include Delta Air Lines, Nucor Corp, Nike, Ulta Beauty, Accenture, FedEx, and Lennar.

Wall Street's view. Analysts have been reducing earnings per share estimates for the first quarter and full year in recent weeks. For all of 2025, EPS growth estimates remain solid with the latest data still calling for full year EPS growth of 11.5%. However, this is down from estimates of 14.1% full year EPS growth as of Dec. 31, 2024, according to FactSet. This will be a trend worth watching in the months ahead due to the fact that stocks tend to follow the direction of corporate profits over time.

Based on recent data, some Wall Street firms are starting to reduce their economic forecasts. For example, Goldman Sachs economists recently lowered their 2025 GDP forecast from 2.4% to 1.7% (which represents the first downgrade in their economic outlook in 2 1/2 years).

Conclusion. Consumer and business sentiment has already declined notably over the past few months. Therefore, from a contrarian viewpoint, if a few things start to go right, the outlook for the economy and equity markets could certainly turn around before too long. Until there is more clarity, I suggest closely monitoring:

   -- Future tariff news. Pay particular attention to news about reciprocal 
      tariffs expected to be announced on April 2, 2025. 
 
   -- Data on the health of the U.S. consumer. These include weekly jobless 
      claims, retail sales, and household balance sheet data. 
 
   -- Monthly inflation data. It could influence when and by how much the 
      Federal Reserve may reduce short-term interest rates in 2025. 
 
   -- Credit spreads. The spread between corporate and Treasury bonds, for 
      example, provide an indication of whether financial conditions are 
      supportive or tight and will likely provide important clues about whether 
      the U.S. economy is likely to hit a short-term speed bump or experience a 
      more meaningful downturn. 

Despite what seems like an unpredictable decision-making process by Trump so far this year, lower taxes, reduced regulation, a rise in productivity from artificial intelligence along with peace between Ukraine and Russia (a big if), could all provide positive tailwinds for U.S. economic growth and financial markets down the road.

Michael Sheldon , CFA, CFP, was formerly chief investment officer of RDM Financial Group in Westport, Conn. He started his career at the Bank of Tokyo Ltd. in New York City, and has worked in fixed-income sales and equity market strategy at other firms. He graduated from Vassar College in 1988 with honors in economics.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 24, 2025 14:35 ET (18:35 GMT)

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