Global Insights Center: Monthly Newsletter

Partners,

 

Tariffs are, of course, the main discussion topic in economics at the moment. The Hartford’s  Global Insights Center has been closely monitoring the latest developments to ascertain the various tariff announcements and their potential impact on economics and geopolitics. Currently, a set of country and product tariffs have been announced. The country tariffs are aimed at nations and all goods that emanate from those countries, regardless of the product type, although some exceptions have been announced. Conversely, product tariffs target specific products regardless of their country of origin, with some exceptions here as well. For example, in the auto sector, tariffs will not be "stacked," meaning an auto part will not incur both the input steel tariff and the auto part tariff. Additionally, in some cases, the tariff rates themselves have fluctuated. Overall, there are various moving parts to the tariffs, making it even more important to constantly follow developments on this topic.

 

March’s headline inflation data moderated to 2.4% year-over-year, down from 2.8% the previous month. This implies that headline inflation is moving closer to the Fed’s target of 2.0%. However, from our perspective and analysis, the currently announced tariffs will likely cause some upward pressure on the prices of various goods. With that said, the rise in prices may temper consumer spending and thereby demand. Overall, it is possible that inflation will rise into the balance of the year.

 

We believe the geopolitical impact will result in a continued re-orientation of trade. Trade will still happen, but where it moves through and where the production of some goods takes place may start to shift. As new trade routes develop, so too will shifts in economic growth around the world, economic partnerships, and thereby geopolitical alliances.

 

Meanwhile, on the labor front, the latest April data indicated that the unemployment rate was largely unchanged at 4.2%, while wage inflation was also unchanged at 3.8%. The April data was consistent with our view that the labor market is coming into balance, meaning fewer job openings relative to available talent. However, some of this may see distortions in the months ahead. It is possible that labor availability will decline in some areas, especially in the transport, logistics, and warehousing sectors. If that happens, then wage inflation may not decline materially going forward. The effects may vary significantly by region. For example, some states are seeing strong inbound movement of residents coupled with an uptick in construction activity. These areas may continue to see particularly strong wage pressures.

 

This past month, we also received GDP growth data for the first quarter, which indicated that the US economy contracted by -0.3% on an annualized basis relative to the previous quarter. Some of this was due to the rise in imports that took place in Q1, attributed to businesses trying to get ahead of the pending tariffs. Additionally, there was a contraction in federal spending, and we are also observing a sequential slowdown in consumer spending, especially on discretionary goods.

 

Finally, construction spending in both the residential and nonresidential sectors is converging and growing at 2.8% and 2.9% year-over-year, respectively. Within the residential sector, most of the spending uptick is on renovations, as opposed to actual housing project starts. On the nonresidential side, much of the growth is still in advanced manufacturing, a theme we have discussed frequently. We expect this trend to continue as some businesses may pull back from expansion in the interim until there is more clarity on the economic front. Similarly, housing demand may remain soft for the same reasons, plus the fact that mortgage rates are still quite elevated.