This week on Inside the Economy, we analyze the strength of consumers in the economy, trade and tariffs, and economics of Russia in Europe. The economic report is still providing minimal worry signs for the current state of the economy. Consumer spending ticked down slightly in February—but has generally remained on trend. What events may have impacted consumer spending in the first quarter? Tariff strategies have been implemented at higher levels than expected but have recently been scaled back. Vietnam was the first country to enter negotiations with the U.S.—what is being discussed with Scott Bessent? What other countries have started talks with the U.S.? Meanwhile, European nations are recognizing the importance of Russia’s vast hydrocarbon supply as energy costs continue to rise. How does U.K. household electricity spending compare to that of the U.S.? Tune in to learn more!
Key Takeaways:
- U.S. Core CPI at 2.8 (YOY)
- Unemployment at 4.2%
- Discretionary Consumer Spending increased 2.1% in February (YOY)
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
A lot of things going on in the market. In fact, it’s been a very interesting couple of weeks. So, I want to talk about what’s going on with the consumer tariffs, kind of an outlook for 2025. And actually, at the end we’ll talk about some of the things in the rest of the world, not the least of which the economics of Russia and how important it probably will be to Europe.
There isn’t anything exciting in the numbers, really. It’s good news. On the Consumer Price Index, the CPI numbers, they’re down. Unemployment numbers, initial claims numbers have not gone anywhere. Unemployment has crept a little bit up a little bit, 4.2. The bond market has adjusted a little bit. There’s been some drama with the tariffs and what’s going on in the media and a few other things. But the market is simply adjusted to the fact that the Federal Reserve is not making any noise about raising interest rates for the foreseeable future.
Right now there’s about a 50-50 chance they might lower rates in June, and we’ll see. I wouldn’t bet the farm on that. Consumer spending is okay. It has slowed a little tiny bit. And you might as well be prepared because the first quarter estimates, first quarter, 2025, the estimates for GDP, gross domestic product are going to be negative, at least negative one and a half, maybe two and a half anyway, it’ll be a bad number. It’ll be a media frenzy. That’ll be the Trump slump or the Trump recession, whatever it is, it doesn’t matter.
Consumer spending is not falling apart, which is the big piece of the economy, very important part of the economy. The numbers aren’t real good. The data isn’t real good. Some of it’s the fire in Los Angeles, some of it’s Hurricane Helene, some of it’s a number of things. But the GDP numbers in the first quarter of 2025 are not going to be good. Okay? I don’t think that is the onset of recession. And even if it did turn out to be a technical recession, which is 2/4 of negative GDP, even if we did that, it’s really not going to mean anything. We’ll talk about the housing market and a few other things.
There really aren’t issues or markets that need to be fixed or bubbles that need to be burst. The economy has adjusted very well to its new environment. Housing. This is not a housing bubble. The prices are only dropping. They’re not collapsing. They’re only dropping in Central Florida and Austin, Texas. Everywhere else, they’re doing pretty well.
Certainly Colorado, most of California, all over the country. They’re holding up. They’re not growing as fast as they were and they shouldn’t. There’s not a bubble that has to be taken apart.
We basically gave up what we made in the last year in the S&P 500 for a day and a half. A lot of that has recovered and basically assume the S&P 500 is going to do okay in 2025. Every indication is that’s exactly what will happen. The issues and the media and the coverage and the drama associated with all the tariffs will probably be over about June, July, summer, S&P 500. Well, it was up today. It probably will be.
There isn’t a reason the S&P 500 would be down. Earnings are okay, the S&P 500. We’ll talk about profits here in a minute, but the earnings per share are a tiny bit high. But the rest of it has been holding up just fine. This is a correction/into bear territory for about a day and a half, a normal part. Nothing dramatic in the rest of it. Profit margins are excellent.
In fact, they’ve been improving the earnings numbers that are going to come out, so on and so forth. It isn’t suggestive that the S&P 500 is in trouble. It’s not. This is what’s just going on in the media right now.
The US is still building a lot of new factories. They’re expanding their own space. They’re doing more technical manufacturing. We’re not going to return to the old days. Yes, the United States has lost its leadership or edge or whatever you want to call it in manufacturing in the last 40 years. And a lot of that was for a good reason, filth not being number one. But it was a huge issue, good reasons at the time. We’re going to bring some back and some supply chain issues back. But the advantage of manufacturing, especially led by tariffs, is that a tariff is easy to apply and very easy to take off, which is exactly what’s going on right now. All of these countries right here, China, European Union, all of them have had tariffs against US Goods for years, some of them decades. Canada’s had big tariffs against the US for decades. South Korea, Taiwan, all of them, India.
Well, whatever the reasons were in the past, that came to a screeching halt. Now the administration has acted. It has thrown a bucket of water on the whole thing. And now they’re going to have to come to Secretary Bessent and or Mr. Chuck, it’ll be Treasury Secretary Bessent. I’m sure Vietnam already has, Argentina has, UK is probably next. Number of other countries are saying, okay, we’ll adjust the tariffs we have against you.
If you take the tariffs you have against us off, which is very likely going to happen. China may not ever, but the rest of them are going to have to, especially Europe, especially Canada. But most of this stuff is going to be bounced around, taken care of and I’ll predict by this summer. This is not going to go on forever. It is a way of leveling the playing field. It’s not going to solve the deficit spending. It’s not going to generate revenue to resolve our 7% of GDP deficit spending. There’s no way that’s going to happen. It is unfortunate that Congress is going to put in some tax breaks, keep the ongoing tax law in place, keeping revenues down. I’m disappointed.
So the deficit spending issue for the US Government is not resolved and it’s not going to be done here. There were some very interesting things going on in the marketplaces when all of these tariffs were announced. There was a lot of movement in the silver market and the gold market. I’ll get to the gold market here in a minute.
Silver market, they were trying to just, they’re just going gangbusters, kind of like the Hunt brothers 40 years ago, trying to corner the silver market. Then at the last minute, it was Secretary Bessent who said, oh, let’s exclude precious metals from the tariffs. Bam! Splash! That’s so much. That’s what happened to the silver market. The glory was over. And all the tons of gold that’s been moving out of Switzerland and a lot of out of England too, to the US some of that is tariffs. That was going to be tariffs.
But there’s also, oh, it’s safer in the US we don’t know if Russia is going to invade us. Whatever the reasons, Switzerland really isn’t the safe haven it used to be. They may not have a national bank here pretty soon. So anyway, the goal is moving to New York. And gold didn’t collapse what it was because gold is still a very good inflation hedge. And even though inflation is down, gold went up a little bit as the market adjusts. The dollar is okay. The dollar still a little strong.
We’ve talked about this. It’s strong because our interest rates are high. It would come down if our rates lowered. That’s not a reason to lower the rates. The dollar is going to be an issue. You’re not going to fix that with tariffs. It is too big an impact on the global economy. So it’s just going to have to be watched. Subtle good news, obviously, and we’ve talked about this. The Federal Reserve has been continuing to roll off the money it put in.
During COVID we talked about that $4 trillion. They’ve been rolling it off. They’ve been letting that stuff mature and very subtly taking that money out of the system, which reduces inflationary pressures. You add a little inflation with tariffs, you reduce it by taking money out of the system, which is what they’re doing. This is commendable. Never talked about, extremely important. We get back to the amount of money we had in the system, like six years ago was much better than we have now.
And finally, as tragic as all of the issues are in the Ukraine, I don’t want to talk about Gaza and the rest of that, but in Ukraine and Russia, the real issue there is Europe is not doing well. They’re not going to do well for the foreseeable future. They’re having trouble with their number one customer, United States, a lot like China did. And they don’t want to repeat in what’s going on with China. Europe’s fundamental problem is really laid out right here. It’s the cost of their electricity. It’s 10 times what we pay for. It’s just huge.
And as France has really been a major supplier over the years, over the decades, most of their reactors, their nuclear plants are getting a little long in the tooth. I think the average one, they’re pushing like 40 years. And France does not have the money to start replacing these facilities. So the natural gas that comes out of Russia is becoming more and more important. It’s not a secret.
As Mr. Putin negotiates an end to this stupidity in Ukraine, and however that transpires, the rest of Europe, especially Germany, Poland, and all of them want to heat their houses. And the best way to do that is a pipeline from Europe, which is nothing but a huge hole of hydrocarbons. So as this transpires, it’s great that Europe is going to start paying for their own defense against Russia. Great, it’s about time.
But the issue is they want to heat their homes and they need to run factories and they need to cut the cost of this electricity, so on and so forth. That’s going to be a big issue with Putin in the near future. And it’s the only thing that’s really going to get Europe moving again.
Okay, I don’t think 2025 is going to be a bad year, don’t view it as bad news, don’t view the current froth in the media about tariffs as wrapping up anything, and certainly don’t worry about negative GDP numbers for the first quarter of 2025. We’re doing fine. S&P will recover, and we will simply shift the focus to more, less dramatic things.
Well, thanks for joining me and as always, send questions along to info@shjwealthadvisors.com I’m happy to answer those questions and I’ll see you next time!
