MarketTrends 03/21/2025: The Uncertainty Tariff

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Members likely didn't feel comfortable changing their rate expectations as the situation in which they are making them is highly fluid. "I don't know anyone who has a lot of confidence in their forecast," said Mr. Powell in a response to a question at his post-meeting press conference. The statement released at the close of the meeting noted that "Uncertainty around the economic outlook has increased" and the words "uncertain" or "uncertainty" were used routinely during Chair Powell's press conference. His prepared remarks stated "the new Administration is in the process of implementing significant policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation [...] while there have been recent developments in some of these areas, especially trade policy, uncertainty around the changes and their effects on the economic outlook is high."

The question is whether or not the uncertainty regarding these things is changing the direction of the economy or not, or if so, by how much. In an answer regarding the "hard" economic data, he said "We do see pretty solid hard data still. So, growth looks like it's maybe moderating a bit, consumer spending moderating a bit, but still at a solid pace. Unemployment's 4.1 percent, job creation most recently has been at a healthy level. Inflation has started to move up now, we think partly in response to tariffs and there may be a delay in further progress [on inflation] over the course of this year. So, that's the hard data. Overall, it's a solid picture. The survey data, of both household and businesses, show significant rise in uncertainty and significant concerns about downside risks. So how do we think about that?" He later added that "For right now, the hard data are pretty solid, we are obviously aware of the soft sentiment data and the high uncertainty and we're watching that carefully..." and "It's the soft data, it's the surveys, that are showing, you know, significant concerns, downside risks, and those kind of things." As a result, "We will be watching very carefully for signs of weakness in the real data."

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To that end, there was a fair bit of new hard data out this week. Regarding inflation, Import and Export price data for February were released; import prices rose by 0.4% for the month, same as in January, lifting the annual rate of price inflation for imported goods to 2%. While that's not a concerning number, the direction for costs is, as the current annual rate is back up to where it was in December 2022. Export costs rose by just 0.1% last month, a sharp retreat from the 1.3% increase in January. That said, export prices are still 2.1% higher than a year ago, and as recently as last September they were still retreating at a 1.8% clip. As with imports, the rate here isn't especially concerning, but the direction isn't exactly comforting.

Not exactly comforting is consumer spending, either. Related to uncertainty or not, retail sales only rose by 0.2% in February, failing to rebound much after a 1.2% decline to start the year. Non-store retailers (internet sales) was the only segment to post measurable gains (+2.4%), perhaps as price-sensitive consumers look for bargains beyond their local stores. Building materials, food and beverage and general merchandise categories posted gains, and those gains may be reflective of price increases rather than higher unit sales. Auto sales were a drag, as were sales at gas stations, joining four other segments with declines for the month. It may be that retail sales are simply taking a breather over the last couple of months after a strong string of gains, but falling consumer confidence and wobbly financial markets may be sapping enthusiasm for spending.

Homebuilders are also less enthusiastic heading into the spring. The National Association of Home Builders Housing Market Index downshifted again, falling three points to 39 for March, declining back to last August's level. The measure tracking sales of single-family homes also declined by 3 points to 43, but the outlook for the next six months held firm at 47. Traffic of potential buyers at sales offices and model homes retreated further, with a five-point fall leaving it at 24. This is as weak as buyer interest has been since December 2023.

Builders lacked confidence despite being more active in February. Housing starts rebounded after a softening in January, rising by 11.2% last month to 1.501 million (annualized) units initiated. Single-family starts sported an 11.4% increase to a 1.108 million pace, the highest in a years' time, while multifamily construction sported a 10.7% rise to a 393,000 annual rate. Despite the February gains, permits for future projects were perhaps indicative of greater uncertainty in the air, as they slipped by 1.2% to an aggregate 1.456 million rate, largely from the multifamily sector. Regardless, it was the lowest annualized number of permits since last October. We'll see how sales of new homes were in February next week.

With regards to the existing home market, the National Association of Realtors reported that sales of previously-occupied homes rang in at a 4.26 million annual pace, a 4.2% increase compared to January. We have to admit a bit of surprise regarding the report; the NAR's own index of signed sales contracts for December and January were both down by 5.2%, suggesting that a decline in sales for February of some magnitude was to be expected. It's a little curious that fewer contracts to purchase existing homes were signed but that sales improved measurably; perhaps one measure or the other is off somehow and revisions to posted figures are in order. Improved inventories of homes for sale may have been part of the reason for the gain in sales, with 1.24 million properties available for home shoppers to consider, up 5% from January and 17% above year ago levels. This represents 3.5 months of supply at the present rate of sale, the same ratio as January. Home prices continue to power higher, with the median $398,400 home price in February up 3.8% compared to year ago levels and the highest February figure ever, per the NAR. Unless there is a sudden dramatic shift, we will likely see new all-time records for existing home prices again later this year.

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A couple of looks at regional manufacturing activity were mixed at best, but both saw higher input costs. The Federal Reserve Banks of New York and Philadelphia chimed in with their March updates on factories this week, and they were rather dissimilar. The FRBNY's local barometer revealed less activity, falling from a +5.7 mark in February to a -20.0 for March. The top-line figure was dragged down by a slump in new orders, which retreated from +11.4 to -14.9; employment metrics deteriorated only slightly, sporting a 0.5-point fall to -4.1 for the month. No deterioration was seen in price pressures; quite the contrary, in fact, as the 44.9 mark for March (+4.7 points) was the highest for this component since December 2022.

The Philadelphia Fed's district saw activity head in the other direction. It's local manufacturing base managed to put in a third consecutive solid month, albeit one with somewhat less activity, as the overall gauge eased by 5.6 points to 12.5 for March. New orders also remained positive but more modest, with the 8.7 reading down 13.2 points from February. Labor conditions improved, though, jumping 14.4 points to 19.7, the highest this component has been since October 2022. Also jumping back to a couple of year-ago levels was the "prices paid" inflation measure; at 48.3 for March (+7.8 points), it is now as high as it was some 32 months ago.

Industrial production managed a gain 0.7% in February. While much of the gain was prompted by a 2.8% increase in output by mining concerns, manufacturing output also contributed, rising by 0.9%, a fourth consecutive month of adding to the tally. We won't get a national update on manufacturing for about two more weeks when the next ISM report is due, but at last look, factory activity had firmed up over the last couple of months, notwithstanding the more mixed messages above. After helping to lift the overall IP number in January, utility output declined by 2.5%, most likely due to somewhat warmer than expected weather in some parts of the country. With the lift in overall production last month, the percentage of industrial production capacity in active use rose to 78.2%, an eight-month high.

The Conference Board's index of Leading Economic Indicators returned to familiar negative territory in February, posting a -0.3% for the month. What originally appeared as a second consecutive increase for the LEI in January was revised away; originally reported as a +0.3% increase, the figure was detuned to a -0.2%, leaving November 2024 as the only positive value for the LEI since February of 2022. It may be that the recent softness reflected here will actually be accompanied by a decline in GDP; it's too soon to tell, but the GDPNow model from the Atlanta Fed pegs growth in the first quarter of 2025 at -1.8%. This figure has improved somewhat over the past few weeks, and we'll see if incoming data for February and March can improve it further.

The labor market keeps on keeping on, which is likely what is keeping economic activity fair despite considerable uncertainty and unhappiness. Initial claims for unemployment assistance continue to perk along at a low level, edging higher by 2,000 in the week ending March 15 to 223,000. Outside of a one-week flare higher, claims have been nearly stable at this low level in four of the last five weeks. Federal layoffs have not yet shown in the initial claims data but are expected to do so shortly, while continuing claims remained about level at 1.89 million in the latest reporting week.

Applications for mortgage credit tailed off by 6.2% in the week ending March 14. The Mortgage Bankers Association reported that requests for funds to purchase homes rose by just 0.1% after a couple of solid weeks in a row, while applications for loans to replace existing mortgages slumped 12.8%, as the recent decline in mortgage rates leveled off. Absent economic or labor market deterioration, mortgage rates don't seem likely to continue to head in a direction that will help raise borrowing activity much, at least for now.

As the Fed waits to see if the "hard" data starts to reflect what the "soft" data suggests, we wonder if growing apprehension by businesses and consumers might be though of as a kind of "uncertainty tariff". The impacts of actual tariffs are expected to slow economic activity and increase costs. Even though they aren't really being felt yet, we already see a damping of consumer and business enthusiasm, a stock market that reflects concern about the murky path ahead and a bond market that continues to reveal concerns that inflation may both move further away from the Fed's target and persist for longer than hoped as progress on price pressures stalls. It may be that this tariff of uncertainty is starting to cast a pall over the economy more broadly, and it also may be that the Fed will be reluctant to try adjust policy to lift activity if inflation isn't cooperating.

The future is of course always uncertain, but significant and unknowable changes to the four items mentioned by Chair Powell can cause both immediate and longer lasting disruption. How much disruption, how long it may last and when it may begin are all unclear, and that makes planning for the near and not-so-near term a real challenge. Mr. Powell's statement of "it's really hard to know how this is going to work out," is quite telling, and "it's really appropriate to wait for further clarity [as] the costs of doing that, given that the economy is still solid, are very low." Let's hope that consumers and businesses don't fully embrace a wait-and-see stance, as that might move the economy from slowing to stall.

None of this will happen in the next week, though. Financial markets didn't necessarily like nor dislike the Fed's message, and stock indices managed a slight improvement by the end of the week, while bond yields moved slightly downward overall. Based on that, we think that the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac will show a decline of 2-3 basis points when the next update comes out Thursday. If so, they will have moved very little over the last month. Amid uncertainty, sometimes the best course of action is to do little or nothing.

Can mortgage rates find any space to decline meaningfully as we head into the spring housing season? See what we think in our latest Two-Month Forecast for mortgage rates covering late February through late April.

See our new 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.

Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".

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