US sentiment sours on uncertainty

The economic landscape in the United States looks different today than it did at the end of 2024. The data suggest economic activity has stalled, in response to policy-driven uncertainty. Other factors, like the Californian wildfires and extremely cold winter weather, may also have also played a role.

ANZ Research expects real US gross domestic product (GDP) to rise by 2 per cent on average in 2025. That’s down from 2.8 per cent in 2024, on the back of weakness in consumer confidence that likely reflects contemporary anxiety, rather any recession risk. Interest rates will begin to decline again from the third quarter.

The US economy ended 2024 with solid momentum. Economic growth was above potential, and employment growth was accelerating after troughing in the middle of the year.

Fundamentally, the economic picture looked healthy. Household balance sheets were in good shape having experienced a sizeable increase in net worth since the onset of the pandemic. Amid a disinflationary trend, the US Federal Reserve was cutting rates which was easing financial conditions. But that’s not the case now.

Soft

The closely watched Atlanta Fed GDPNow, as of March 18, suggests first-quarter 2025 GDP growth could contract by a seasonally adjusted annualised rate of 1.8 per cent. This is largely being driven by soft January retail data, and record import volumes as firms front loaded imports ahead of expected tariffs. As such, the GDPNow estimate seems pessimistic. Nevertheless, caution over the growth outlook is warranted.

US President Donald Trump began his second term by issuing 103 Executive Orders (EO) in a little over two months, much more than any recent president at a similar juncture.

Most pressing from the financial market’s perspective are Trump’s EOs on tariffs. On inauguration day the administration issued a statement on trade policy outlining its strategy towards trade. In effect, this was to make the case for using tariffs where trade practices are deemed unfair and on national security grounds. Recommendations of this review are due in early April.

Nonetheless, Trump has acted already by implementing tariffs on a few countries (Canada, China and Mexico) and on products (aluminium, steel, and motor vehicles). Trade policy uncertainty is high.

Lengthy periods of heightened uncertainty can negatively impact growth. For example, the spike in uncertainty has been cited as a factor behind falling consumer confidence and higher surveyed inflation expectations. This has raised concerns about a possible slowdown in consumer spending, the mainstay of economic growth, given that it accounts for two-thirds of GDP.

Weak consumer confidence is sometimes cited as a factor in the 1990-91 recession, although that was a period of extreme uncertainty surrounding the Gulf War.

Studies on the empirical relationship between US consumer sentiment and consumer spending have identified think tank The Conference Board’s expectations sub-component index of sentiment as having the closest relationship with consumer spending. This may be because ‘services’ includes many categories of discretionary spending that are more likely to be vulnerable to mood shifts.

In February, the Conference Board’s expectations index fell 9.3 points to 72.9. A reading below 80.0 is usually an indicator that a recession is coming. Prior to the pandemic, this had been a good indicator of business cycle fluctuations, but it hasn’t worked in recent years. One possible explanation is that high post-pandemic savings smoothed household consumption.

In any case, historically, recessions have not been driven by weakness in consumer sentiment. They are normally associated with some form of economic shock where the unemployment rate is rising.  

This is not the case at present. Hiring growth accelerated in the second half of 2024 and the unemployment rate has been relatively steady around 4.0 per cent through 2025 so far, in line with average.

ANZ Research thinks the weakness in consumer confidence is reflecting current anxiety, rather than rising risks of an imminent recession. Real US GDP is forecast to rise by 2.0 per cent on average in 2025 - down from 2.8 per cent in 2024 - and further slow to 1.9 per cent in 2026.

Early 2025 inflation data confirm current restrictive monetary policy settings are consistent with inflation moving towards target. In February, headline and core consumer prices rose 0.2 per cent, month on month, taking the annual rates to 2.8 per cent year one year for headline and 3.1 per cent for core. The latter’s rise was the lowest since April 2021.

Core services inflation, the sticky element to overall inflation, accounts for 61 per cent of the consumer price has been easing and was 4.1 per cent year in February, its lowest since January 2022. That said, it is still too high, and work is needed to bring inflation back to target. It’s too early to tell what impact tariffs will have on inflation, as this policy space is incomplete. If the tariffs so far remain, this would lead to modestly higher inflation over 2025.

No hurry

US Federal Reserve officials have been unanimous in they are in no hurry to resume cuts. Fed Chair Jerome Powell said that despite uncertainty about the economic outlook, there is no need to rush into adjusting policy. He said there is significant uncertainty around policies on trade and immigration and what their impacts might be.

Most Fed officials view the path back to 2 per cent inflation as bumpy. Form their perspective the progress on housing services and non-housing services inflation has been good but slow. The labour market is no longer regarded as a source of inflation, which supports a soft-landing scenario.

Several Fed officials have become more cognisant of the upside risks to inflation given the rise in the University of Michigan’s measure of long-run household inflation expectations to a three-decade high in March. This concern is likely to translate into a lengthier pause on current restrictive monetary settings.

As expected, the Fed left rates unchanged at its March meeting. ANZ Research maintains its view rate cuts will resume in the third quarter unless real final sales and the labour market signal material slowdown risks.

The Fed will remain attentive to its dual mandate, whilst assessing the impact of the new administration’s policy changes. ANZ Research’s assessment is the underlying disinflation process is intact and that rates will fall an additional 75 basis points this cycle before the fed funds ceiling bottoms out at 3.75 per cent from in the first quarter of 2026. That is 25 basis points cuts in the third and fourth quarters of 2025 and in in the first quarter of 2026.

Tom Kenny is a Senior International Economist, Brian Martin is Head of G3 Economics, and Bansi Madhavani is an Economist at ANZ

This is an edited excerpt from the ANZ Research report “ANZ Research Quarterly: A Trump pivot, not put”, published March 20, 2025