The specter of stagflation looms over the U.S. economy, as recent "soft" data from sentiment surveys and supply manager indexes indicate troubling signs. The Institute for Supply Manufacturing's (ISM) survey of purchase managers revealed that factory activity barely expanded in February. Simultaneously, new orders experienced their largest drop in nearly five years, while prices surged by the most in over a year. These developments underscore the complex economic environment facing the nation.
Consumer spending in January plunged at its steepest rate in almost four years, despite a sharp rise in income. This paradoxical scenario adds to the concerns about economic health. The Atlanta Federal Reserve's GDPNow gauge has further exacerbated these fears by downgrading its projection for first-quarter economic growth to an annualized decrease of 2.8%. Such a contraction would mark the first negative growth since early 2022 and the most significant plunge since the COVID-19 shutdown in 2020.
Long-run inflation expectations have soared to their highest levels in nearly three decades, contributing to a general sentiment of unease. Multi-year lows in consumer confidence reflect this apprehension. Meanwhile, the benchmark 10-year note yield has fallen to approximately 4.2%, down from its January peak. Alarmingly, the 3-month note yield now exceeds the 10-year note yield, creating an inverted yield curve—a historically reliable recession indicator dating back to World War II.
Markets have begun to price in a higher likelihood that the Federal Reserve will cut interest rates by June. There is speculation that the Fed could reduce its key borrowing rate by three-quarters of a percentage point this year to stave off further economic downturns. Notably, the U.S. has not witnessed a resurgence of inflation coupled with economic slowdown of this magnitude since the 1970s and early '80s.
Former President Donald Trump emphasized a focus on Main Street rather than Wall Street, asserting:
"Wall Street's done great. Wall Street can continue to do fine, but we have a focus on small business and the consumer." – Donald Trump
Trump also expressed intentions to revitalize manufacturing jobs domestically:
"We are going to rebalance the economy, we are going to bring manufacturing jobs home." – Donald Trump
Economic strategist Hackett cautioned about the potential risks of discussing stagflation openly:
"We have to be observant. There's the potential that the stagflation term just by itself, by talking about it, can manifest some of it." – Hackett, Nationwide strategist
Hackett also downplayed immediate concerns about entering a stagnation period:
"I'm not in the we-are-in-a-period-of-stagnation camp, but that is the disaster scenario." – Hackett, Nationwide strategist
Economist Zandi highlighted rising inflation expectations and public anxiety about growth:
"Inflation expectations are up. People are nervous and uncertain about growth." – Zandi
Zandi provided reassurance that the U.S. economy is unlikely to experience stagflation akin to past decades:
"Directionally, we're moving toward stagflation, but we're not going to get anywhere close to the stagflation we had in the '70s and the '80s because the Fed won't allow it." – Zandi
Commerce Secretary Howard Lutnick offered an optimistic outlook for America's economic future:
"This is going to be the greatest America. We'll have a balanced budget. Interest rates will come smashing down, and I mean 100 basis points, 150 basis points lower." – Commerce Secretary Howard Lutnick
Lutnick assured that President Trump would fulfill promises to bolster domestic manufacturing:
"This president is going to deliver all of those things and drive manufacturing here." – Commerce Secretary Howard Lutnick
Treasury Secretary Scott Bessent acknowledged the challenges ahead:
"There's going to be a transition period." – Treasury Secretary Scott Bessent
The administration's prioritization of Main Street over Wall Street reflects a strategic shift towards supporting small businesses and consumers amidst economic uncertainty. The inverted yield curve continues to serve as a cautionary signal, reminiscent of past recessionary periods.