Mid-March Market Outlook: Recovery Amid Rising Uncertainty

As the second quarter of 2025 nears, the economic landscape remains clouded by policy shifts, inflation signals, and a cautious consumer. Last week offered some short-term relief in the equity markets and industrial output data—but long-term visibility continues to be hindered by a volatile global trade environment.

Markets Nudge Forward but Eyes Remain on Tariff Impacts

• Equities Rebounded Slightly: The Dow (+1.2%), S&P (+0.5%), and Nasdaq (+0.2%) all posted gains, breaking a four-week losing streak. The rally followed the Fed’s decision to hold interest rates steady and reiterate its projection for two cuts in 2025.

• Yields Sent Mixed Signals: The 10-year Treasury note inched up to 4.26% on Friday, suggesting the market remains attuned to inflation expectations even as the Fed signaled a softening stance.

Despite the gains, the market's optimism remains fragile. Uncertainty surrounding the full scope and permanence of Trump’s newly enacted tariffs is creating unease in both investment and labor markets.

Federal Reserve Adjusts Growth Outlook

• GDP Forecast for 2025 Trimmed: The Fed revised its real GDP projection down from 2.1% to 1.7%.

• Inflation Outlook Edges Higher: The GDP deflator estimate rose to 2.7% (from 2.5%).

• Quantitative Tightening Slows: In a move to support liquidity, the Fed announced a scaling back of balance sheet reduction efforts.

The Fed views tariff-driven inflation as transitory, but its broader tone suggests a readiness to support growth if demand softens.

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Tariff Fallout Begins to Appear in Data

• China Tariffs Fully Enforced: Unlike Canada and Mexico (who received a 30-day delay), China faces immediate tariffs—prompting retaliatory actions on U.S. coal, LNG, and farm equipment.

• Supply Chain Disruptions Expected: With China representing:

  • ~30% of U.S. containerized imports,

  • 11% of U.S. coal export markets,

  • and ~40% of U.S. rare earth imports,

  the ripple effects across manufacturing, energy, and tech sectors are material.

Sectoral Highlights: Consumer Still Spending, Industrial Sector Warming Up

Consumer & Retail

• Retail Sales: Up 0.2% in February after a revised -1.2% in January.

• Control Group (feeds GDP): Rose 1%, signaling healthy core demand.

• Non-store Retailers: Up 2.4%; Health and Personal Care: +1.7%.

• Lagging Categories: Bars and restaurants (-0.5%), gas stations (-1.5%).

Spending is moderating—not collapsing—but the coming tariff-induced inflation could challenge household purchasing power.

Industrial Output

• Overall Production: Rose 0.7% in February.

• Manufacturing: Up 0.9%, including an 8.5% surge in auto production.

• Mining: Rebounded +2.8% after a prior -3.2% decline.

• Utilities: Fell -2.5% due to milder weather.

The industrial sector finally appears to be recovering—yet the longevity of this rebound is threatened by tariff-induced cost pressures and unpredictable policy signals.

Inflation: Still Creeping Higher

• Import Prices: Up 0.4% in both January and February; the 12-month rate now stands at 2.0%.

• Imported Fuel: Surged 1.7% in February; core import prices (ex-food/fuel) also rose 0.4%.

Companies are likely adjusting pricing in anticipation of higher input costs from tariffs—adding to inflationary pressures before their full effects even begin.

External Trade: Temporary Improvements, Structural Concerns

• Current Account Deficit: Narrowed slightly in Q4 to $303.9 billion, but 2024 ended with a 25% YoY increase in the deficit to $1.13 trillion.

• Goods Imports: Up 5.7% in Q4, as companies front-loaded orders ahead of tariff hikes.

• Exports: Down in key sectors like aircraft and semiconductors.

The dollar’s global reserve status continues to insulate it—for now—but growing deficits raise longer-term sustainability questions.

What to Watch This Week

• Friday’s Personal Income & Spending Report:

  • Income projected +0.4%

  • Spending +0.5%

  • PCE Deflator +0.3%

This report will offer a timely view of consumer resilience and inflation trends just before tariffs begin to fully embed into pricing structures.

The economic waters may have calmed—for now—but the mud remains thick. Strategic navigation will be essential in the months ahead.  FTR can be your guide through the uncertainty.

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