Preparing for Change
By Dr. Charles Lieberman, Co-founder and CIO
Government policy is changing daily under the new Trump Administration, sometimes hourly. Much of what has been announced has been anticipated in one form or another, but there are also surprises and investors must react to all of it. We remain confident that solid growth is continuing, so the starting point is good. But the outlook will depend, of course, on which economic policies emerge and in what form, with tariffs and border policy among the most important. We expect both to add to inflation pressures, although it is too soon to understand by how much. We must remain nimble.
Growth remains quite solid, disparaging comments about the latest jobs report notwithstanding. Hiring came in slightly below forecasts, but only if one ignores the more than 100,000 upward revision to the prior two months. Moreover, wages rose 0.5% and the unemployment rate declined to 4.0%. That helps finance consumer spending, but it also raises business costs and creates upward pressure on inflation. And again, this is the starting point. If illegal immigration is halted, as seems quite likely with troops on both sides of the border, let alone if some immigrants in the U.S. are evicted from the country, the labor market will tighten quickly.
The other major issue concerns tariffs and we’ve only seen the opening salvo in this battle at this early stage. The tariff threat may be intended to gain concessions in some other area having little to do with trade. How this plays out matters. The threat of tariffs is pushing companies to redesign supply chains and to bring production home or closer to shore. Such investment, occurring while tech companies are planning to spend many billions for AI, will keep the economy rolling along with demand for workers. These are not conditions that will enable inflation to moderate.
Efforts to reduce regulation and cutbacks in government bureaucracy may help reduce business costs, which will offset some of the inflation pressures suggested above. But these benefits may require some time to appear and the net effects are still likely to produce higher prices.
The Fed is now on hold, but there appears to be no real prospect for inflation moderating any further and some risk that inflation could rebound. The proof’s in the pudding, of course. The Fed is waiting to see how things play out.
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