Macro market analysis playlist

February 2025 highlights

The shape I’m in: In the lead-up to his confirmation, US Secretary of the Treasury Scott Bessent advocated for a neat and tidy “3-3-3” plan for the US economy. The first of those 3’s refers to achieving 3% real GDP growth. At first blush, that seems like an ambitious and worthy goal, but further scrutiny suggests it’s neither as ambitious nor as feasible as it sounds, given the US economy has been averaging nearly 3% growth for the past two years and looks set to cool in the months to come.

Jawbone: The second pillar of Secretary Bessent’s plan calls for reducing the federal budget deficit from nearly 7% to 3% by 2028. But once again, details are sparse, and success is likely to prove challenging, particularly given the growth target. Fiscal impulse is a function of the change in the size of the deficit, not the level of spending. With growth set to moderate in the coming months, growing out of the deficit seems unlikely while shrinking the deficit by increasing revenues or reducing spending will translate to a negative fiscal impulse. Not only are the first two “3's” challenging to achieve, but they are in direct tension.

It makes no difference: “Drill baby, drill.” A great rallying cry, but one with little bite behind it. The final pillar of Bessent’s 3-3-3 plan aims to increase domestic oil production by 3 million barrels per day. The problem: US production is already hovering near record highs at 13.5 million barrels per day. The energy complex has learned its lesson when it comes to oversupplying the market. It’s no longer about volumes or prices; it’s all about profits and return on equity. You can lead the oil industry to public lands, but you can’t make them drill.

The night they drove old Dixie down: The market and the Fed remain overly hawkish – too sanguine on growth and too pessimistic on inflation. While the labor market has certainly shown welcome signs of stabilization, suggesting the cooling we’ve witnessed has been a function of normalization and not a recessionary negative-feedback loop, there’s little evidence to suggest a reacceleration. Risks to employment remain skewed to the downside, and the labor market continues to provide a disinflationary impulse to the economy as nominal wage growth slowly cools.

The weight: Despite continuing fears around inflation risks posed by looming tariff threats, the current direction of travel for inflation remains clear. There’s little evidence of sticky inflation as idiosyncrasies, quirks and lags continue to fade away. The most notable of the lagged components of the inflation basket, housing, has finally downshifted back into the pre-pandemic range with more cooling ahead. Slowing nominal income growth, easing shelter costs, and easy comps from last year’s Q1 surge make for a far more optimistic outlook than the broad consensus currently holds.