Stagflation has become the latest buzzword in financial markets as President Trump promises more tariffs, with reciprocal levies set to come as soon as Wednesday.
Concerns about stagflation, a bleak economic scenario where growth stalls, inflation persists, and unemployment rises, have risen following a string of disappointing data releases, along with the Trump administration's shifting trade narrative and other policy unknowns, including recent efforts to cut government jobs from Elon Musk's Department of Government Efficiency (DOGE).
"It’s really a shame that Trump is so willing to take a wrecking ball to the economy," Ed Yardeni, president of Yardeni Research, wrote in a note to clients on Monday. "It has been very resilient over the past three years in the face of the tightening of monetary policy."
Yardeni upped his probability for the US entering a stagflation period to 45% from the prior 35%, adding that the scenario includes the possibility of a shallow recession during the second half of this year.
The strategist pointed to several economic indicators, including faltering manufacturing activity and higher prices paid by purchasing managers, warning, "The higher inflation part of stagflation is almost a certainty."
On Friday, data released by the Bureau of Economic Analysis showed consumers spent less than forecast in March while inflation rose more than anticipated — a sign that stagflation cracks are beginning to show up in hard economic data, or objective metrics. That coincided with weak survey and sentiment readings, often referred to as soft economic data, which highlighted increased pessimism on the outlook for inflation and the US labor market.
Notably, the Federal Reserve has maintained a base case that tariff-induced inflation will be "transitory" and, therefore, have a short-term impact on price growth. This was reflected in the central bank's latest projections, which forecast year-end PCE inflation rising to 2.7% before reaching its 2% target by 2027.
But economists have argued "transitory" inflation remains an unrealistic expectation.
"We continue to think that Fed officials are underestimating the extent to which tariffs are likely to push up inflation," Capital Economics deputy chief North America economist Stephen Brown wrote in reaction to the decision.
Along with higher inflation, economists argue growth risks remain tilted to the downside, mostly due to the ripple effects of Trump's tariff unknowns. Currently, the Federal Reserve Bank of Atlanta's GDPNow tracker, which analyzes incoming data points, signals negative growth of 2.8% in Q1.
At its most recent policy meeting, which concluded on March 19, the Fed lowered its 2025 economic growth forecast to 1.7% from the prior 2.1%, noting in the policy statement, "Uncertainty around the economic outlook has increased."
But as tariffs serve as the most immediate threat to growth and inflation, a resilient US labor market continues to assure Wall Street watchers the economy can avoid a recession — at least for now.
"I would get a lot more concerned if the labor market were to start to crack," Aditya Bhave, senior US economist at Bank of America, told Yahoo Finance on Monday. "As long as we're generating job growth, we're generating income growth, and then there's room to spend."
As a result, Bhave said he doesn't see recent data points as recession precursors.
"We see this as a soft patch," he said. "Nominal spending still looks OK. Most importantly, the labor market is holding up, and I won't give up on the US consumer as long as the labor market holds up."
The March jobs report, set for release on Friday, will serve as the latest test. Economists polled by Bloomberg expect the US labor market added 135,000 jobs in the month, down from the 151,000 seen in February. Meanwhile, the unemployment rate is expected to hold steady at 4.1%.
source: finance.yahoo.com.com
