The fiscal landscape in the United States is being redrawn as we write. At the height of the panic in early April, the VIX index—Wall Street’s fear gauge—spiked up to levels not seen since the early days of the pandemic. As the month wore on, the index experienced a dramatic drop-off, landing in readings in the low 20s. This volatility is symptomatic of larger economic uncertainty, most notably the upcoming tariff decisions and changes to the labor market.
According to reports from Wells Fargo and Bloomberg, the 25-year mean of the VIX index is 19.8. That means current levels of volatility are just a notch higher than what’s been historically normal. This surge in the VIX index coincides with ongoing discussions regarding trade policies under the Trump administration, which may reduce tariffs if successful negotiations with other countries come to fruition.
For now, the monthly jobs reports have displayed a consistent deceleration in the strength of the labor market. As analysts have long cautioned, at this pace we would see a full stop by late summer. With a likely increase in the unemployment rate by year’s end, consumer confidence and spending power is in question.
Even in the face of these trials and tribulations, equity markets have generally recovered the vast majority of their trading losses incurred in early-April. Investors should be rejoicing over the new GDP measure. Indeed, it was the star of the show, rising at a stunning 3.0% annualized pace in the opening quarter. Notably, we should emphasize that the economy experienced a technical recession during this time. A back of the envelope calculation suggests GDP growth slowed by 0.3% on a quarter over quarter annualized basis.
Real net exports were the biggest contributor to this contraction, slicing off -4.8 percentage points from first-quarter GDP growth. Analysts are watching economic indicators with bated breath, as we should see domestic demand slackening considerably. Further, they know that net exports will only give a small lift through the end of the year.
In light of these new factors, forecasts are calling for a notably more cautious U.S. economic forecast. Analysts are expecting the effective tariff rate to fall to about 15%. They want it to remain flat through the end of their forecast period in Q4-2026. Despite the uncertainty created by tariffs, experts are cautiously optimistic that the economy can escape a hard landing.
“We need (1) tangible examples of successful dealmaking to avoid some fallout from tariffs. We also need (2) enough of a slowdown in the labor market to compel the Fed to lower rates in the back half of this year, yet (3) not enough of an about-face in the labor market to forestall income growth from sustaining consumer spending.” – Wells Fargo
The road forward for U.S. economic prosperity seems like a pretty slim slice of gravel. Analysts suggest that while tariffs inject uncertainty into the economic outlook, there are still opportunities for growth if strategic decisions are made. The Federal Reserve may need to respond to labor market changes by adjusting interest rates later this year to support continued consumer spending amidst evolving economic conditions.