US stock indices spiked higher on Monday, but are looking to finish the week lower (as of Friday morning). Monday was a sign that investors are looking for patches of blue sky, but clouds of uncertainty remain in the forecast.
We received a lot of economic data for the month of February this morning. Most importantly, the Fed’s favorite measure of inflation, core personal consumption expenditures (core PCE), showed that the inflation rate was a little higher than expected at 2.8%. Additionally, consumer spending accelerated 0.4% last month, slightly below the forecast of 0.5%. However, personal income rose 0.8%, which was much higher than the expected 0.4%.
https://www.cnbc.com/2025/03/28/pce-inflation-february-2025-.html
So, with all the negative press about the US economy lately, let’s go back to the fundamentals – the key data we use to assess the condition of any economy.
Real GDP 2.5% (4th quarter)
Unemployment rate 4.1% (February)
Interest rates 4.33% (Fed rate)
Inflation rate 2.8% (core PCE)
These are very good numbers for the largest economy in the world. Plus, the US stock market has far outperformed overseas markets for the past 15 years, and is now about 8% below its all-time high reached on February 19th. This decline reflects increasing uncertainty about the future.
There is always uncertainty, but now the range of potential outcomes is getting much wider. And while it’s impossible to predict short-term outcomes in markets and economies with any certainty, there is one group of people who forge ahead with unbridled confidence anyway – economists.
I’m always amazed at the confidence with which so many economists talk about the future. Don’t get me wrong, I think they can do a great job explaining why things happened in the past, but their track record isn’t so great when attempting to understand the present or forecast the future.
Here’s a good example.
Economists at the Atlanta Fed have models that attempt to understand real-time economic date in order to predict US economic growth (GDP) for the current quarter. Currently, the Atlanta Fed economists are forecasting -2.8% real GDP “growth” for this quarter.
https://www.atlantafed.org/cqer/research/gdpnow.aspx
This is a terrible number. If the possibility of an economic contraction makes you uncomfortable, I suggest you focus your attention on the economists at the New York Fed.
https://www.newyorkfed.org/research/policy/nowcast#/nowcast
2.72% GDP growth is much better. So it’s now clear that, according to some highly respected economists with the Fed, the US economy is growing at a rate somewhere between -2.8% and +2.7%.
Now I’m not picking on economists merely for entertainment purposes. I’m concerned when I hear investors using the predictions and forecasts of economists to potentially alter their investment plan, or making other important decisions. If you were considering investing in internet companies in the 1990s, or artificial intelligence now, Nobel Prize-winning economist Paul Krugman has been offering his investment advice.
Economies and markets are incredibly complex and made even more unpredictable by the effects of human emotions. We should be humble in our inability to predict the future and be wise in adopting an investment plan that is prepared for a wide range of potential outcomes.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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