The Good: Resilient Hard Data in a Cloudy Economy
Despite a swirl of negative headlines and widespread anxiety over tariffs, several key economic indicators are still flashing green.
- Consumer Spending Remains Robust
Retail sales hit a record in March, and card spending data from major banks shows consumers are still opening their wallets in April. This continued strength is a classic sign of economic resilience. However, some analysts suggest that this might not be the whole story. There’s growing evidence that consumers are “front-running” tariffs-pulling purchases forward to avoid anticipated price hikes-especially on big-ticket items like cars and appliances. If so, today’s strong numbers could mean weaker sales down the road as the effect unwinds.
- Business Investment Ticks Up-But for How Long?
Orders for nondefense capital goods excluding aircraft (i.e. machinery and equipment)-a proxy for business investment-rose to a new record in March. As a leading indicator, this typically signals confidence in future growth. Yet, this uptick comes even as many businesses report they are pausing or reconsidering investment plans due to tariff uncertainty. It’s possible that some of this strength is also due to companies accelerating purchases ahead of expected tariff hikes, rather than a sign of enduring optimism.
- Labor Market and Household Finances Stay Solid
Unemployment claims ticked up slightly but remain at levels consistent with a growing economy. Meanwhile, household bank balances, especially among lower-income Americans, are still well above pre-pandemic levels. This financial cushion is helping to support ongoing spending, even as inflation and policy uncertainty loom.
- Housing Shows Mixed but Positive Signs
While existing home sales have dropped, new home sales and home prices are both up, and mortgage rates have stabilized. Most homeowners are insulated from recent rate increases due to fixed-rate mortgages locked in before the latest surge.
The Bad: Soft Data and Emerging Cracks
While hard data (facts, figures, statistics, etc.) has held up, sentiment and some forward-looking indicators are painting a much gloomier picture. It’s important to note though, soft data (opinions, feelings, expectations, etc.) tends to over-exaggerate in periods of crisis as survey respondents tend to become less objective and rational.
- Sentiment Slumps Across the Board
Surveys of consumer confidence, business optimism, and purchasing manager outlooks have all fallen sharply. The University of Michigan and Conference Board indexes are near multi-year lows, and the NFIB’s Small Business Optimism index (2nd chart) has tumbled. This broad-based pessimism is largely attributed to ongoing tariff and trade policy uncertainty, which most economists agree is a net negative for growth.
- Wage and Income Expectations Deteriorate
The average “reservation wage”-the minimum pay workers would accept for a new job-has dropped sharply to ~$74k from a previous high of $82k in November, especially for men and older (45+) workers. This signals growing concerns about future income and job security.
- GDP Growth Turned Negative
Q1 2025 GDP moved into negative territory, driven by a large increase in imports (a negative to GDP) and decreased government spending (primarily defense spending decrease) but was partially offset by an increase in investment spending (some of those headlines we shared in our Golden Age presentation are coming through). If you strip out the large increase in imports, GDP growth for Q1 would’ve been positive. Not that that changes anything for Q1’s negative print, but we’d expect imports to come down over time as the tariffs take effect. (Note: front-running may still be occurring as it’s still cheaper today with the tariff pause, but we wouldn’t expect it to be as dramatic as this most recent quarter).
The Ugly: The Disconnect and Uncertainty
The most confounding aspect of the current environment is the stark divergence between what people expect (soft data) and what they’re currently doing (hard data).
- A Widening Gap Between Sentiment and Activity
The Goldman Sachs chart illustrates this disconnect: sentiment measures have consistently disappointed, while actual economic activity has outperformed. Historically, soft data tends to lead to hard data, but this relationship has broken down, creating confusion for policymakers and investors alike.
- Tariffs and Policy Uncertainty Cloud the Outlook
Tariff policy remains the wild card driving US trade policy uncertainty index to an all-time high. The threat of new tariffs has caused businesses to alter supply chains, reconsider investments, and in some cases, accelerate purchases in anticipation of higher costs.
- The Reality of Who’s Paying the Tariffs
(link to source: https://x.com/WyzeCam/status/1917669237751185577)
Labs Inc (a camera/home security company) based in Seattle, Washington. The order was for $167k of goods and was subject to a $255k tariff charge which was paid for by Wyze. The company said that it’ll take them ~60 days to move production to Vietnam to escape the 145%+ Chinese tariffs (though if no deal is made in the 90-day pause, that rate goes back to 46% from the current 10% on Vietnam as announced on Liberation Day). Now this isn’t to say US consumers will pay the entire tariff rate, but we’ll definitely pay for some depending on the product (i.e. buyer vs. supplier pricing power, if you buy 90% of the global output, you have leverage to negotiate with supplier, but if you buy 10% of the global output, kick rocks).
Bottom Line
President Trump’s sweeping tariffs have injected significant uncertainty into the global economy, with early estimates warning of a potential 6% hit to U.S. GDP and a notable rise in prices for American households. While these trade actions threaten to disrupt corporate earnings and economic growth, the long-term outlook for the stock market remains supported by expectations of continued earnings growth. Many companies have adapted by cutting costs and investing in productivity-enhancing technologies like automation and AI, allowing modest sales growth to translate into strong profits.
For now, demand for goods and services is holding up, thanks to healthy consumer and business balance sheets and a resilient-if cooling-labor market. However, recent data shows that some of this demand may be artificially boosted by businesses and consumers rushing to make purchases before tariffs take effect, and growth forecasts for the year have been revised downward. Notably, there’s a growing disconnect between solid hard data and weak sentiment surveys, as confidence has slumped even while actual economic activity remains steady.
It’s important to remember that the stock market and the broader economy don’t always move in lockstep. Positive operating leverage may allow earnings to outpace revenue growth in the near term, but persistent trade frictions and rising costs could eventually weigh on profits. Risks-from political uncertainty to global tensions-remain ever-present, and investing will never be a smooth ride. Still, history shows the economy and markets have weathered shocks before, and for long-term investors, staying focused on fundamentals has always paid off in the end…
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.