Good news on the inflation and shutdown fronts, but tariffs overhang persists

Trend watch

Spring break season is kicking into high gear. Weekly air passenger counts jumped 4.5% in the past week, crossing the 17 million mark for the first time this year. It continues to run ahead of 2024 and 2019 on a year-to-date basis, by 1.2% and 9.4%, respectively.

Hotel occupancy has also remained in-line with typical seasonal trends; however, hotel bookings for this summer appear soft, especially for mid and lower-end hotels, according to our lodging & leisure equity research analyst at Truist Securities. Similarly, our cruise industry analyst has noted a deceleration in the pace of future cruise bookings beginning in mid-February compared to December and January. There are many possible causes for both, so its premature to conclude that it’s a red flag signaling a broader pullback in consumer demand. Nonetheless, it does jibe with the tumble in consumer confidence. 

Our take

Among the good news this week, two of the three main inflation gauges show that prices generally cooled more than expected in February (see slides 7 and 11). Of course, not all items have cooperated as egg prices continue to fly higher (slide 8).

Additionally, as we write this, it appears that there won’t be a government shutdown this weekend as Congress apparently has the votes necessary to get a stopgap funding bill passed.

Yet, the tariffs ever-changing tariff landscape appears to be taking a toll on consumers and businesses alike as evidenced by multiple months of sentiment surveys, including the University of Michigan (slide 12) and Conference Board consumer sentiment surveys, the NFIB survey of small businesses, and the Business Roundtable CEO survey.

This uncertainty casts a long shadow over the economy, clouding decision making for businesses. Indeed, based on our conversations, businesses desperately want these trade issues to be resolved quickly. To wit, the most frequent sentiment has been, “even if tariffs are increasing – just tell us, but don’t hopscotch from one day to the next,” which would allow them to adjust and move forward.

Accordingly, many businesses are taking a ‘wait & see’ approach, which seems prudent. However, wait & see isn’t pro-growth either for the economy or for business profits. At the very least, it delays action that some businesses would have taken, while others may eventually choose to cancel plans all together due to the uncertainty. Furthermore, the longer this uncertainty drags on, the more impact it will have on the economy.

Which brings us to – what is the appropriate response by the Federal Reserve (Fed), which meets on March 18–19? Indeed, the Fed has also been in ‘wait & see’ mode. That’s especially wise given the uncertainty around trade and tariffs, potential job cuts and fiscal austerity due to the Department of Government Efficiency (DOGE).

We see the Fed staying on hold with respect to additional rate cuts at the March meeting. However, that doesn’t mean the Fed won’t be busy. It will provide its latest thinking on the pace of economic growth, jobs and unemployment, inflation, and the path of interest rates, which is collectively known as the Summary of Economic Projections (SEP). We still have two quarter-point rate cuts penciled in for this year.

We anticipate that the Fed will eventually stop reducing the money supply and shrinking its balance sheet, a process known as quantitative tightening (QT). While we think that will occur this summer, the Fed may give an update as to the timing at this meeting.  

Bottom line

The U.S. economy remains resilient, and we believe solid growth will endure; however, it’s in a holding pattern awaiting resolution on the tariffs. Additionally, uncertainty regarding the impacts of policy shifts by the new presidential administration and Congress remain a further headwind for the economy in the near term. That has contributed to the recent bouts of volatility in financial markets, which we expect will continue for the foreseeable future.