April 8, 2025
.
Small business optimism declined 3.3 points in March to 97.4 after falling 2.1 points in February to 100.7 after having declined 2.3 points in January. The media focus seems to be on the fact that the index has declined in each of the past three months. That is true, But the index level also remains at the 40-year average so-called breakeven point for this series which is 98.0. Note also that small business optimism was below that breakeven level for the previous three years and yet the economy performed well.
NFIB Chief Economist William Dunkelberg said, “The implementation of new policy priorities has heightened the level of uncertainty among small business owners over the past few months. Small business owners have scaled back expectations on sales growth as they better understand how these rearrangements might impact them.” Sixteen percent of owners reported that inflation was their single most important problem in operation this business (unchanged from February). A net 30% plan price hikes in march, up one point from February and the highest reading since March 2024.
We expect to see 1.5% GDP growth in the first quarter and 2.5% GDP growth in 2025. . The economy still seems to be growing at respectable pace despite the policy gyrations coming out of Washington.
The core CPI is expected to quicken to 3.8% by yearend which means that the core personal consumption expenditures deflator should rise about 3.3% in 2025. This is the inflation measure that the Fed targets at 2.0%.
The funds rate currently is 4.3%. The so-called “neutral” funds rate used to be about 2.8% but it now appears to be higher, perhaps around the 3.5% mark. Thus, Fed policy remains slightly restrictive. But the Fed has two problems if it chooses to ease in response to the dramatic stock market selloff. First, GDP growth has yet to slow significantly. Every fears that a slowdown will occur in the months ahead. But the reality is that Trump could change his trade positions at any time and much of the stock market drop would be quickly reversed. At the same time the core inflation rate is quickening, not edging closer to the desired 2.0% target. Misguided Fed policy is not the source of the problem. Trump’s trade policies are. The solution to the problem will come from Trump, not the Federal Reserve.
Stephen Slifer
NumberNomics
Charleston, SC
Follow Me