The Weakening Economy Needs Rate Relief

Equity markets were down for the week (again). But it could have been much worse, as the closing results were much improved from Friday’s lows at about 1 pm Eastern Time. The S&P 500, for example, finished the day with a +2% gain as markets rallied into the close.^[1] As shown in the table, 2025 has been mixed with the S&P 500 and the DJIA positive while the tech heavy Nasdaq and the small-cap Russell 2000 are negative for the year.

Uncertainty is clearly the order of the day (Trump vs Zelenskyy, DOGE’s actions to terminate thousands of federal jobs, the imposition of tariffs beginning March 5^th). It has now appeared to have permeated and soured investor views. The volatility the markets just experienced oftentimes marks a turn in investor attitudes. According to Rosenberg Research, only 29 other times over the last 9000+ trading sessions have we seen the intraday volatility that occurred on Friday (February 28^th).^[1] The other occasions occurred in 2022, 2020, 2018, 2008, 2002, 2001, 2000, 1999, and 1998. Some of these years were years of Recession.

Despite showing strong sales and profits (+80%) and guiding higher, Nvidia’s stock still got pummeled, down -7% for the week and about the same year-to-date.^[1] It isn’t every day that a tech titan comes in with such good numbers and its share price tanks. A look at the Mag 7 in total shows lower prices across the board for the week and for six out of the seven on a year-to-date basis (Meta being the exception).

Could it be that the markets see a slowing economy? Or has the market just run too far?

Housing

So far in 2025, all the housing data have tanked.

• January’s New Home Sales were off -10.5% from December;^[2]
• Time on the market for the New Home segment has gone from 2.5 months in November to over 3 months currently, a rise of 20%;^[3]
• According to Rosenberg Research (2/26/2025), New Home prices have fallen -3.4% over the last 12 months. While some may applaud the fall in price, there is no doubt that demand has weakened;
• Existing Home Sales were also off nearly -5% in January (-4.9%) with the West leading the way (-7.4%, perhaps stoked by the LA fires!);^[4]
• Pending Home Sales, i.e., contracts signed but not yet closed, fell -4.6% month/month in January, even worse than December’s awful -4.2% number.^[5] Such sales are off -5.2% from a year ago.^[6] Worse, the Pending Home Sales Index, at 70.6, is at an all-time low (index began in 2001).^[7]

Most analysts blame these downtrends on high interest rates. But, as shown in the chart below, mortgage rates have been at or near 7% since late 2022; so, something else must be at play. Perhaps the slowdown in the general economy is the culprit!

The weakening economy, high mortgage rates, and the perception by consumers that inflation will continue to be an issue, has taken its toll. The chart shows that consumers still see many hurdles to overcome in the home buying process.

Unemployment

Initial Claims for Unemployment Insurance rose +22K in the week ended February 22^nd to 242K from 220K the prior week.^[1] Continuing Claims, at 2,234K are nearly +101K higher than a year ago.^[2] Due to the DOGE purges in D.C., these numbers will certainly rise sharply over the next few months. Depending on how rapidly the economy slows, we expect the U3 unemployment rate to rise to somewhere between 4.5% and 5.0% over the next six months.

Inflation

Inflation is a process. It isn’t “high prices.” Those “high prices” are the result of inflation. One cause of inflation that economists and the folks who run the Fed worry about is something called the “wage-price” spiral. Simply put, this is where rising wages cause businesses to raise prices which in turn leads to demands for higher wages.

The chart shows the year/year wage and salary growth rate (blue line) and a smoothed version of the JOLTS “Quits Rate.” Note the strong relationship. When the Quits Rate falls, so does the rate of wage growth. That seems logical. The Quits Rate falls when employers cut back on hiring and jobs become harder to find. The Conference Board’s latest Consumer Confidence Survey complements this chart, showing a rise in the consumer view that jobs are now harder to get than they were just a few months ago. Also in that Survey, the view that there will be fewer jobs over the next six months hit a 12-year high. Generally, we find such views in a slowing economy. Hence, our view that inflation will be at or below the Fed’s target by mid-year.

Consumer Confidence

The University of Michigan’s most recent Consumer Sentiment Survey hit its lowest level since November ’23. Inflation expectations over the next 12 months spiked to 3.5% in December.^[1] This is the highest level for this indicator since April 1995!! No doubt the tariff threats from the Trump Administration played a key role. Just for clarity, the tariffs will have an initial impact on inflation, but economists believe that it is a one-time adjustment and doesn’t feed the inflation process. This is a problem the Fed is going to have to deal with and it is likely why markets don’t see any rate decreases for several months.

Final Thoughts

Policy uncertainty has had a large impact on the equity markets. “Tariffs On,” “Tariffs Off.” Which will it be? March 5^th appears to be the destiny date. If the tariffs are actually imposed, expect more equity market volatility as that will be another hurdle for the economy.

There is no doubt that the U.S. economy is slowing. This appears to be a worldwide phenomenon as the economies of China and those in Europe are slowing too. In the U.S., we’ve recently seen a decline in Retail Sales, and we know that it isn’t a one-off because Walmart gave very soft guidance.

Housing is the poster child for the economic slowdown. The latest housing data screams Recession. And the latest consumer confidence surveys have all turned negative.

High interest rates are killing the housing sector. New and Existing Home Sales continue to slow. Because inflation expectations are stuck at levels higher than the Fed’s target rates, the prospect of much needed interest rate relief still appears to be several months away.

Our view is that the Fed is already behind the curve, and if they wait until the inflation indexes actually hit their 2% goal before granting rate relief, the economy will already be in Recession. Remember, interest rates impact the economy with long and variable lags. This Fed’s mindset: “No rate relief until the inflation numbers yield.” But if they wait much longer, it will be too late. In fact, they may have already waited too long.

(Joshua Barone and Eugene Hoover contributed to this blog.)