The noise level about the domestic economy downshifting from the strong finish in 2024 to that of a softer first quarter of 2025 is on the rise. There are several empirical and anecdotal points of evidence and fresh views from leading market economists that corroborate the facts and the growing narrative that the Trump 2.0 trade has some wood to chop to fortify recently damaged investor sentiment.
Just to be clear, there are no hidden agenda items that are suddenly clouding the market’s landscape. The red wave that defined the elections spelled out being tough on Fentanyl, illegal human trafficking, sealing the borders, killing terrorists, punishing sanctuary cites, leveling the tariff playing field, getting out of Ukraine with some well-deserved payback of military support and rinsing federal bureaucracy of needless workers, waste, fraud and abuse that has contributed to the $38 trillion deficit.
None of these rapid-fire policies are a surprise or out of left field. What is being found is that there are millions of people with non-essential jobs in the local, state and federal government are now feeling what it is like to live in the private sector. Corporations and businesses of all sizes are constantly having to make hard decisions to survive and thrive. Congress and the government have been living very high on the hog for decades, and it is all coming home to roost. The debt-laden punch bowl is empty.
Multitudes of fraudsters that work in places of government power, allocating public funds to businesses owned by families and friends where millionaires were being printed, should not just lose their jobs, but do hard time. The people that make up DOGE and the AI tools they are employing to do a deep dive into all the corruption isn’t sitting very well in many parts of the DMV (DC, Maryland, Virginia) beltway bandit society that has lived extra large on the sweat of everyday American taxpayers. I live here.
Markets have long ignored the oncoming trainwreck with the federal debt and the systemic government corruption controlled by Super Pac organizations that don’t care about fiscal responsibility — just power, control and short-term hyper wealth building. So, let’s look at what is influencing the bearish market sentiment and why the bad medicine being applied will result in a higher market by year end.
Cautious Consumer — The two most recent data points regarding the U.S. consumer came in below forecast, the blame being laid on renewed concerns of inflation, the impact of tariffs and job security painted by the federal layoffs.
The final University of Michigan Index of Consumer Sentiment for February dropped to 64.7 (consensus 67.8) from the preliminary reading of 67.8. The final reading for January was 71.7. In the same period a year ago, the index stood at 76.9.
- The Conference Board’s Consumer Confidence Index dropped to 98.3 in February (consensus 103.1) from an upwardly revised 105.3 (from 104.1) in January.
- This was the largest monthly decline since August 2021.
Weekly Initial Jobless Claims Trending Higher — Initial jobless claims for the week ending Feb. 22 increased by 22,000 to 242,000 (consensus 220,000). Continuing jobless claims for the week ending Feb. 15 were 186,700 (prior revised to 186,700 from 186,900). The four-week moving average for initial claims increased by 8,500 to 224,000. The four-week moving average for continuing claims increased by 3,000 to 1,865,000. The key takeaway from the report is that initial jobless claims reached their highest level since early December, which will add to the market’s festering concerns about a slowdown in growth.
High Profile Layoffs and Fewer Job Openings — I noted last week that six weeks into 2025, the number and size of white-collar layoffs would be noteworthy. Many would lose their jobs from Feb. 10. Chevron announced two weeks ago that it will will lay off 20% of its global workforce, or roughly 8,000 employees. BP announced layoffs of 7,700. Microsoft announced an undisclosed number of layoffs. Meta announced another round of layoffs, 5% of its workforce to around 3,600 employees. Workday laid off about 1,750 employees, or 8.5% of its staff, Google is offering voluntary buyouts to workers in its platforms and devices units and Salesforce laid off 1,000 this month.
DOGE Elimination of Non-Essential Debt Bloating Government Jobs & Programs — Dante DeAntonio, labor economist for Moody’s Analytics, told FOX Business that the federal government has about 3 million workers, excluding the military, as of the start of 2025. Federal workers account for about 1.9% of U.S. payrolls, and he said that the “private sector should be able to absorb some of these workers. We estimate that about 100,000 federal workers have already been laid off or have accepted the deferred buyout offered by the Trump administration.”
“The biggest risk is that the layoffs we have seen so far are just the tip of the iceberg. The magnitude and timing of future layoffs will determine whether the labor market can stay on the rails,” DeAntonio explained. “We currently expect that the size of the federal workforce will shrink by about 400,000 throughout 2025 due to a combination of the ongoing hiring freeze, deferred resignations and DOGE-initiated layoffs.”
Personal Consumption Expenditures Index (PCE) Data is Goldilocks — The Fed’s preferred inflation data, The PCE Price Index was up 0.3% month over month, as expected, and up 2.5% year over year versus 2.6% in December. The core-PCE Price Index was up 0.3%, also as expected, and was up 2.6% year over year versus 2.9% in December, moving nicely lower month over month. At the same time, personal income increased a robust 0.9% month over month in January (consensus 0.3%), led by a 1.8% jump in personal current transfer receipts, following a 0.4% increase in December, and personal spending declined 0.2% month over month (consensus 0.2%) following an upwardly revised 0.8% increase (from 0.7%) in December.
This set of data points is exactly what the maligned bond market needed to right itself, and right itself it has, with the yield on the 10-year Treasury moving from 4.80% in early January to the current rate at 4.23%. A huge move based on newfound fears of a recession grounded in uncertainty about the risk of trade wars, tariff-induced inflation, a widespread crackdown on illegal immigration and the unknown future of all those non-essential government workers that now have to redefine themselves and live like everyone else.
The latest read from the Atlanta Fed GDPNow report went suddenly negative. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -1.5% on Feb. 28, down from 2.3% on Feb. 19. Really? A 0.8% swing in a single week over the threat of tariffs that may impact only 11% of the total U.S. economy? But consider the source. While the Atlanta Fed itself is not a “liberal body,” some of its focus areas and public statements may align with issues that are often associated with liberal viewpoints.
There may be some intended headline impact on this latest release. Current Atlanta Fed President Raphale Bostic was appointed in 2017 by the Senate, led by then-U.S. Senator Sherrod Brown (D-OH) ranking member of the U.S. Senate Committee on Banking, Housing and Urban Affairs, citing the persistent lack of diversity among presidents and directors at the Fed’s 12 regional banks. This is problematic when the brightest minds available aren’t shaping monetary policy due to political agenda.
Regardless of the Atlanta GDPNow data, the job market is softening at a pace that is arguably picking up speed. The Fed has a dual mandate: price stability by keeping inflation in check and to strive for maximum employment. Currently, there is a 93.0% probably the Fed will keep the Fed Funds Rate unchanged at 4.25-4.50% at the March 19 Federal Open Market Committee (FOMC) meeting and a 30.2% probability the Fed lowers by a quarter point at the May 7 FOMC meeting. I would contest that the Fed is once again behind the curve and will scramble by mid-year to counter an eroding job market that is just now showing some empirical cracks.
Against this backdrop, the Cash Machine model portfolio has a strong weighting in high-yield corporate debt that will largely benefit in this environment. To see more about how to capture a 10%+ yield on invested capital seeking outsized income, go to my website at www.bryanperryinvesting.com and click on Cash Machine to learn more.
