Economic Update: April 21, 2025

Growth

The U.S. economy expanded at a healthy 2.4% q/q saar during the fourth quarter, bringing real economic growth to 2.8% y/y in 2024. Consumer spending continued to power the economy forward, growing at an exceptional 4.0%, while government spending moderated. Business fixed investment turned negative due to declines in equipment and intellectual property spending while residential investment rose after lagging for two quarters. Elsewhere, inventories were a large drag on economic activity. While policy uncertainty remains, economic momentum appears solid for now.

Jobs

The March Jobs report showed a labor market that remained resilient through 1Q25. Nonfarm payrolls rose by a stronger than expected 228k, boosted by favorable weather effects. However, revisions put this report more in line with expectations. Service sectors continued to drive job growth while hiring in goods-producing sectors slowed. Government employment rose but was weighed down by a decline in federal payrolls. Meanwhile, unemployment rose to 4.2% while wages rose 0.3% m/m and 3.8% y/y. While solid, this report reflects the strength of the labor market as of the “survey week,” which was the second week of March. Events since then, most notably the president’s tariff announcement on April 2, suggest a bleaker picture going forward.

Profits

The 1Q25 earnings season is well underway with 13.1% of market cap reporting. Currently, consensus is projecting pro forma EPS of $60.39. If realized, this estimate would represent y/y growth of 7.0% and q/q growth of -8.2%. Looking at the three main sources of EPS growth, sales, margins and shares are expected to contribute 4.2, 3.8 and -1.0 percentage points, respectively, to y/y growth. So far, 70% of companies have beaten estimates, and earnings have come in 6.3% above consensus. Technology is once again contributing the majority of EPS growth, followed by health care on weak comparisons. Energy and materials are still struggling through weak oil prices and muted demand from China. While early results have been solid, management teams are concerned about tariffs and postponing guidance until policy crystalizes.

Inflation

While slightly dated, the March CPI report came in softer than expected, providing evidence that inflationary pressures were at bay ahead of recent tariff announcements. Headline CPI fell 0.1% m/m and rose 2.4% y/y as gasoline prices tanked, while core inflation delivered its slowest increase in four years. Core goods prices fell 0.1% m/m as used vehicle and medical care commodity prices fell. Shelter inflation eased to 0.2% due to weakness in lodging, but primary rent and owners’ equivalent rent were firmer. Excluding shelter, core services inflation fell 0.2% m/m, lead lower by airline fares and auto insurance. While welcome, investors shouldn’t put too much weight on this report. As businesses adjust to new tariffs, prices should be pressured higher.

Rates

At its March meeting, the FOMC voted to leave the federal funds rate unchanged at 4.25%-4.50%. With tariffs top of mind, updated economic projections reflected expectations for slower growth and higher inflation in the near term. Further out, inflation forecasts were largely unchanged, suggesting the Fed expects any inflationary impulse from tariffs to be transitory. The dot plot was left unchanged with two rate cuts still penciled in for 2025. Turning to the balance sheet, the pace of QT was slowed with the Treasury redemption cap lowered from $25bn to $5bn. The MBS cap was left unchanged at $35bn. With elevated uncertainty, the pace of rate cuts will continue to hinge on incoming economic data.

Risks

• Tariffs could challenge economic growth while putting upward pressure on inflation.
• Market volatility will likely remain elevated until policy uncertainty turns to policy clarity.
• Slowing economic growth could weigh on earnings and forward guidance.

Investment Themes

• Fixed income offers attractive levels of income and protection against an economic downturn.
• The ongoing equity market rotation should present opportunities in sectors outside of tech.
• Fiscal stimulus in Europe and China should support better international performance.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

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Originally Posted April 21, 2025 – Economic Update

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