Mike Dolan
Markets are spending so much time trying to figure out where Donald Trump’s economic policies are headed that they may fail to see how much risk is created by the simple fact that no one knows what’s happening next.
The new Trump administration’s deliberate ambiguity on trade tariff policies and geopolitical alliances appears designed to keep rival negotiators guessing and calculated to wring concessions, but it may take a toll on the U.S. economy if corporate America doesn’t know what exactly they’re planning for.
For the economy, that’s proving toxic. Delays in business and household decision-making may mark the biggest threat to the country’s lengthy economic expansion and Wall Street’s still-expensive valuations.
U.S. business and consumer surveys suggest it’s getting harder to understand what prices or policies will prevail moving forward. That means projects, hiring, deals and investments are likely to be postponed until the coast clears. Whether it will ever truly clear during this administration is now a salient question.
ISM’s February survey of manufacturing firms showed that both new orders and employment readings have slipped back into contractionary territory after some post-election buoyancy, while tariff-irked inflation expectations are back on the rise. And S&P Global’s poll of businesses in the U.S. dominant service sector showed overall activity turned negative last month for the first time in 16 months.
In some cases, the uncertainty is skewing behaviour to such a degree that it’s weighing on key components of gross domestic product calculations.
Net international trade, for example, is a major input into GDP math. But as U.S. firms rushed to frontload imports to dodge looming trade tariffs on goods from abroad, the trade deficit jumped as a result–sending GDP estimates into a tailspin.
Loaded into the closely-watched Atlanta Fed “GDPNow” model, the net exports variable posits the first quarterly contraction in overall U.S. GDP in nearly three years and the deepest since the pandemic lockdowns of 2020.
While some dismiss the number as a statistical glitch, it’s still alarming in an investment universe where many have convinced themselves that the business cycle has died–and priced most U.S. securities accordingly.
And a problem for those who think tariff distortions will wash out of the mix soon is Mr. Trump’s seeming intention to keep the prospect of ever higher and broader tariffs dangling indefinitely.
More than it can stand
Even many of those who consider the Atlanta Fed’s red flag to be a false one also think it’s ominous as a precursor to the very real impact that could be felt from the tariffs, slashed federal government spending and public sector job cuts.
UBS Global Wealth Management’s U.S. economist Brian Rose described the GDPNow swoon as “noise rather than a signal”–but he added that this week’s planned tariff hikes on Canada, Mexico and China are a real cause for concern.
“If implemented, these tariffs would deliver a significant shock that may be more than the economy can withstand at the moment.”
Other relatively bullish Wall Street investment houses are similarly antsy about the recent turn in sentiment.
Morgan Stanley economists on Monday said some of the sudden gloom may be overdone but the uncertain sequencing of U.S. policies remains a worry.
They argue that policies likely to hamper growth and spur inflation, such as trade tariffs and immigration curbs, look set to come first, while policies that could boost growth, like deregulation, are apt to come later or “maybe not at all” in the case of tax cuts.
And they noted that the spending cuts underway are in areas with “high multipliers”, meaning their impact is magnified. They added that announced layoffs may reduce federal employment by 31,000 per month through September and a proposed hiring freeze may cut employment by a similar amount.
In a week where markets are watching the February payrolls report with nervousness, those numbers will resonate.
And with Wall Street in the peculiar position of finding many of its main stock indexes in the red for the year thus far, there is a risk that market turbulence will drain household and business confidence further.
Finally, even those who think America’s economy can remain a relative winner despite all the trade tensions and policy upheavals should remember that roughly 40% of overall revenues from the S&P500 firms are sourced overseas.
So any global economic damage caused by U.S. policies is apt to boomerang right back home.
(The author is a columnist for Reuters)
Published – March 04, 2025 02:45 pm IST
