Macro Signposts | 26 February 2025

As we prepare for next week's Cyclical Forum, where PIMCO professionals gather to discuss and debate the global outlook for economies and markets, this week we'll share a shorter edition of Macro Signposts and focus on a few interesting charts highlighting macro trends.

Trump's Second Term: Sentiment, Uncertainty, and the Macro Outlook

Donald Trump's first term in the White House coincided with a period of solid U.S. growth and relative price stability, at least until the COVID-19 pandemic. Following Trump's election to a second term, many observers initially seemed to expect a return of the same macro conditions. However, expectations now appear to be shifting amid more aggressive policy announcements. The extent these expectations lead to changes in behaviors - such as more savings, and less hiring and investment - is yet to be seen. In our view, the economic risks appear to be shifting to the downside.

In 2016, following Trump's election, the prospect of corporate tax reforms and deregulation spurred speculation that Keynesian "animal spirits" would boost the U.S. economy. Post-election surveys indicated increases in both consumer and business sentiment, and the U.S. equity market rose. Measures of economic policy uncertainty (see Figure 1, below) - and trade policy uncertainty in particular (Figure 2) - also rose after the 2016 election, developments that tend to weigh on business hiring and investment decisions. However, the U.S. economy experienced average annual real GDP growth of 2.8% in the three years before the pandemic (2017-2019). Indeed, sweeping corporate and household tax cuts and more modest trade actions, mostly targeting China, coincided with generally good overall economic outcomes.

The initial reaction to Trump's election in 2024 was similar across measures of both sentiment and uncertainty - initially, they rose. However, more recent data paint a somewhat different outlook compared with eight years ago. Uncertainty has persisted, while sentiment has deteriorated (see Figures 3 and 4). What's more, inflation expectation gauges have started to tick up. The mix of more aggressive trade policies, less room for additional tax cuts, and rising questions about government services might be tilting perceptions about the balance of risks.

Regardless of the eventual outcomes, we think the initial reactions in the markets - similar to those seen in the sentiment surveys - likely reflect greater focus on expected pro-growth policies, such as the potential for more near-term tax cuts and deregulation. However, the announcements since Trump's inauguration have been more focused on potentially disruptive trade policy actions and steeper cuts in government services (although there are questions about how government efficiency announcements will actually translate into lower congressional appropriations in any reconciliation bill). Markets might be catching on to the balance of risks. Indeed, as we stated in our January Cyclical Outlook, what is certain is that uncertainty has grown. Amid elevated valuations for risk assets, bonds may provide more stable return potential, despite the broader macro uncertainty.

All indicators in the below charts are normalized, and the zero on the x-axis is set to 30 September prior to the presidential elections in November 2016 and 2024, respectively; the x-axis tracks subsequent monthly changes in readings.

Figure 1: Economic Policy Uncertainty Index

Figure 1

Source: Economic Policy Uncertainty Index - research directors Scott R. Baker (Northwestern University), Nick Bloom (Stanford University), and Steven J. Davis (University of Chicago). Monthly measurements are from July 2016 - March 2018, and July 2024 - February 2025. A higher number indicates greater uncertainty.

Figure 2: Trade Policy Uncertainty Index

Figure 2

Source: Trade Policy Uncertainty Index - researched and published by economists Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo. Monthly measurements are from July 2016 - March 2018, and July 2024 - February 2025. A higher number indicates greater uncertainty.

Figure 3: University of Michigan Consumer Sentiment Survey

Figure 3

Source: University of Michigan. Monthly measurements are from July 2016 - March 2018, and July 2024 - February 2025. A higher number indicates higher (more positive, optimistic) consumer sentiment.

Figure 4: Conference Board Consumer Confidence Survey

Figure 2

Source: The Conference Board, a global think tank. Monthly measurements are from July 2016 - March 2018, and July 2024 - February 2025. A higher number indicates greater consumer confidence.

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