Is the US headed for a drop in GDP growth?

The list of things to watch in the US continues to grow: tariff negotiations, slowing US growth, inflation concerns, a potential government shutdown, and a wild ride for the 10-year US Treasury yield among them. On top of that, this week brings a European Central Bank meeting and the start of China’s National People’s Congress. Here are the top things for global investors to keep an eye on in March.

Tariff negotiations

The fear of tariff wars is negatively impacting US consumer sentiment and spending.  However, if we were to see a quick end to the tariff threats – as some countries are trying to do by attempting to meet US President Donald Trump’s demands – I believe we would likely see a fast rebound in sentiment and spending. In the short term, tariff negotiations are critical to economic growth in the US. Unfortunately, it looks like we are headed towards more tariffs in the near term. I expect them to weigh on US stocks, just as they did in 2018.

Signs of a deterioration in US growth

More signs are appearing of a “growth scare.” It’s not just a large drop in consumer confidence –we’re seeing signs of a slowdown in a variety of economic data:

• US personal spending declined 0.2% in January, which was worse than expected.¹  
• Both retail sales and industrial production for January were lower than expected.
• The flash S&P Global US Services Purchasing Managers’ Index (PMI) dropped into contraction territory in February at 49.7, down from 52.9 in January and well below expectations.²
• The new orders sub-index of the US ISM Manufacturing PMI Survey fell into contraction territory in February, from 55.1 to 48.6, experiencing the biggest drop since March 2022. ³
• The Atlanta Fed GDPNow, which forecasts gross domestic product (GDP) growth in real time, has experienced a wild swing as of late. On Feb. 19, the model anticipated 2.3% GDP growth for the first quarter, but as of Feb. 28, that expectation changed to a 1.5% drop in GDP growth.⁴

Yes, the Atlanta Fed is now predicting an actual drop in GDP growth for the first quarter. You may recall that two consecutive quarters of negative growth makes a recession. Now the first quarter is far from over, so the Atlanta Fed GDPNow measure could easily swing back into positive growth territory with additional data points. And any downturn in economic growth could be very short-lived, as it seems to largely be a reaction to concerns about tariff wars. We’ll want to follow the data closely to ensure the US economy isn’t deteriorating too quickly – that starts this week with the US Employment Situation Report for February, as well as anecdotal information from the Federal Reserve Beige Book to be released this week.  

Signs of a US inflation resurgence

There is a lot of concern that there will be a rebound in US inflation. We see it in US consumer inflation expectations, with one-year ahead expectations now at a very high 4.3%.⁵ And we see it in market-based inflation expectations; the 5-year breakeven inflation rate has climbed from a low of 1.86% on Sept. 10, 2024, to 2.61% on Feb. 28, 2025.⁶  While the most recent Personal Consumption Expenditures (PCE) print was rather tame, the prices paid sub-index of the ISM US Manufacturing PMI survey rose from 54.9 last month to 62.4, a big jump that was well above expectations.⁷ As with the University of Michigan Survey of Consumers, this is not what we want to see – a drop in growth and an increase in prices. As I said last week, it raises concerns about the potential for stagflation.

We’ll want to follow data releases closely for signs of a resurgence in inflation. I’m most focused on average hourly earnings, which will be released this Friday, March 7, as part of the US Employment Situation Report.

Messaging from the Federal Reserve

Thus far, the Federal Reserve (Fed) has indicated that it is more concerned about inflationary risks than risks to growth. This is rather typical for the Fed. It seems that Federal Open Market Committee members are more worried about avoiding becoming the next Arthur Burns than the next Herbert Hoover.

However, I think the Fed’s focus would change if we see more signs of economic deterioration. If this is not accompanied by a rebound in inflation – in other words, the stagflationary environment we all fear — then I expect it will bring us closer to more easing. However, it will be important to pay attention to the Fed’s messaging on this to see how its perceived risks are evolving.

The 10-year US Treasury yield

When US Treasury Secretary Scott Bessent said that the Trump administration would focus not on cajoling the Fed into cutting rates but instead bringing down the 10-year US Treasury yield, I didn’t think it would happen so quickly – nor did I think it would be driven by expectations of diminishing growth.   

The 10-year US Treasury yield has been on a wild ride in recent weeks, peaking at 4.79% on Jan. 14 and falling to 4.21% on Feb. 28.⁸  Today it has fallen even further. Now we do have to recognize that a drop in the 10-year yield isn’t always a good sign. A decomposition of the 10-year US Treasury yield — looking at the various components that influence it — indicates that the market expects more inflation and less growth given the decline in the real yield. That combination has historically been negative for US stocks. We’ll want to tread carefully in the near term.

US fiscal situation and possible government shutdown

House Republicans have introduced a budget proposal that rolls all major Trump campaign promises into one bill. It would extend the 2017 tax cuts and add in new tax cuts, which would cost $4.5 trillion. It would add nearly $3 trillion to the fiscal deficit over 10 years.⁹

There was dissension among House Republicans over this spending bill. To bring fiscal hawks on board, the plan stipulates that House members must find nearly $2 trillion in federal cost savings over 10 years, or else they will have to reduce their planned $4.5 trillion in new tax cuts by an equal amount. It is expected that Senate Republicans will make major modifications to this plan.

This is happening at the same time the US hurtles towards a March 14 deadline to fund the government’s current budget, which could easily result in a government shutdown. It seems that House Speaker Mike Johnson will attempt to get a “clean” continuing resolution passed, which would extend the existing budget through Sept. 30, 2025. However, Democrats, alarmed that the Trump administration is cutting federal employees and spending in areas where Congress has already appropriated the funds, want to insert language in the funding bill to ensure that the administration actually spends the money approved by Congress, in keeping with the long-held view that Congress has the power of the purse. Because House Republicans have such a narrow majority, all bets are off in terms of the success of negotiations.

There is so much disorder and uncertainty in Washington, DC, that it is hard to imagine stocks won’t be negatively impacted albeit temporarily — especially given they are already experiencing jitters over tariffs.

The European Central Bank

When it meets this week, the European Central Bank (ECB) will be tackling a lot of issues, including sluggish growth, sticky services inflation, the potential for tariff wars, and of course geopolitical uncertainty. Expectations are for a dovish ECB this year. However, we need to ask whether there is anything that could stand in the way of this. I think it’s unlikely. While inflation has been relatively sticky in recent months, some disinflationary progress has been made. I think ECB President Christine Lagarde is unlikely to provide any forward guidance this week beyond assurances that the central bank remains very data-dependent, but I expect that to translate into significant easing this year. I expect a rate cut from the ECB this week, and likely three more rate cuts this year. I expect these cuts will in turn be an important driver of strong European equity returns this year.

China’s National People’s Congress

Chinese policymakers are gathering in Beijing this week for the annual National People’s Congress (NPC). The NPC starts on March 5 and lasts for a week. One key thing we’ll be looking for is the government’s growth target for 2025. We think it’s likely to be about 5% with an estimated fiscal deficit of 4% of GDP.

We could see policymakers step up fiscal easing and stimulus to counteract US tariffs or save some dry powder for later. Chinese equities seem to be expecting more stimulus given their strong recent performance. Despite the recent tariff developments, Chinese equities have outperformed their emerging market and global peers, and the renminbi has remained stable.¹⁰   

Earnings growth forecasts

With slowing economic growth in the US, analysts are beginning to downwardly revise earnings expectations for 2025.  This could pressure US stocks and should be watched closely.

Dates to watch

With contributions from David Chao and Paul Jackson