Welcome to the May Economic Outlook report.

My name is Natalie Gallagher

and I am the principal, economist

and director of economic research here at Ford.

I'm gonna spend some time today walking

through the most realistic trajectory

for the US economy in a post tariff environment, which

as we're going to discuss in detail, is anticipated

to be marked by below trend real GDP growth,

accelerating inflation,

and unfortunately a weakening labor market.

Now, to really set the stage for where GDP growth

or economic growth is anticipated to head in 2025,

I wanna compare against where it was anticipated to,

to land back in early January.

And so you can see here

that the landscape has drastically shifted

over the last several months.

Back in early January, we were having conversations around

to what degree the economy was anticipated to outperform.

Now of course, the conversation shifted to

what degree it's anticipated to underperform.

Now this sharp downgrade really sets the stage

for a much more vulnerable economy as we make our way

through 20 25, 1 that's much more susceptible

to shocks driving.

The initial positive estimate

or more positive higher estimate was, you know, steady,

resilient consumer spending, bolstered by real income gains.

We also saw a lot of evidence

of further business investment.

Now of course, we're in a much different picture, um,

when it comes to both of these factors.

Now highlighting one of the, the main reasons the,

the impact from tariff induced price pressures is really a

higher overall inflation rate,

a re-acceleration in the inflation rate.

And this comes down to the fact that

as producers experience higher input costs,

they're very likely to pass those on to the end consumer,

which is of course where we get sort

of this re-acceleration in inflation.

You can see here that we did anticipate inflation to come

down over the year.

It was anticipated to be a bit sticky,

but really decelerate back down to that 2% fed target

probably getting there around early 2026.

Now we're sort of in a realm

where we don't anticipate inflation to dis inflate.

We actually anticipate it to re-accelerate about mid-year.

So question I get quite often is,

when is this actually gonna hit the hard data?

Um, down to some fundamentals, it is anticipated

to hit the data closer to May, June, July timeframe now

is anticipated to filter through

to consumers in not only higher prices

that they're paying at the store,

but it also hits home to their purchasing power.

So when we look at real disposable personal income,

which is income,

and then we inflation adjusted to get it in real terms,

we see that before tariffs real income was expected

to grow at 1.7%.

Now this is a pretty healthy cadence

to support resilient consumer spending.

Now we've sort of downgraded that estimate following

that increase in inflation down to 0.9%.

Now this is a pretty low growth rate.

So if we take out 2022 from the equation,

it's actually the lowest growth rate since 2013.

And it's not that consumers are going to see their

paycheck shrink, but when they, when they go to the so

and buy volume quantity, there's, there's a drag there on

how much they can actually afford.

So the real purchasing power sort

of hit hardest in this regard.

Now at the same time, unfortunately.

So we've really honed in on two legs

of the stagflation stool, if you will.

We've hit on lower economic growth as well

as accelerating prices.

Sort of the, the third, the trifecta

to bring it all together is a rising unemployment rate,

which we do see on the horizon.

So over the last several quarters, inflation has sort

of plateaued off about four to 4.2%.

We do anticipate it's gonna rise up to 4.5%

and around quarter three

and then sort of hold there in quarter four.

And while this isn't a catastrophic rise in the unemployment

rate, it does sort of speak to the,

the labor conditions

that individual job seekers are really facing.

So, you know, in, in survey reports, in sentiment vari

variables, we really see that consumers are coming out

and they're saying, you know, we're having a really hard

time finding work.

So even though the unemployment rate might look low in a

historical sense, it's actually a really

competitive environment.

And this is actually affirmed when we looked at things like

the continued claims data or the average week unemployed.

Now this is anticipated to continue

and even get a little bit more difficult for job seekers

as we make our way through the year.

And businesses are sort of put in this position

where they have to be quite cautious

and quite intentional with the decisions that they make on,

on the cost side of their balance sheet.

Now when we zoom out, there's sort of a pattern of

economic pressure that becomes really prevalent

and really concerning.

And so in the last five years we've really had about,

we're on our third sort of economic pressure point.

First came covid, which was a true black swan event

that no one could have predicted or controlled for,

but of course it's still a psychological strain on, um,

on households, on individuals

as the pandemic sort of takes hold.

Second, you have 2022 where consumers are grappling

with the highest since the 1980s aggressive monetary

tightening and also supply side constraints.

That's a difficult time as well.

And this time around, you know, it's policy driven

with tariffs, fueling price increases,

and also just general economic uncertainty causing quite,

quite a bit of heartburn.

You know, not only for households

but also for businesses, really just everyone involved.

And what's critical here is actually the compounding effect.

So consumers haven't really had time to

psychologically recover right from the pandemic.

And then 2022 and then inflation is coming under control.

There's, you know, extreme inflation fatigue.

Now they're sort of getting hurled into the next, um,

the next saga if you will, the economic volatility,

which is a trade war and tariff price pressures.

Now this is sort

of resulting in consumers approaching the economy not

as sort of a stable entity that chugs along,

but much more something

that is quite volatile shifts quite frequently.

And it really changes the mindset

of the consumer into a more defensive positioning

than we may be in.

We're in say, the great expansionary period

after the oh eight recession recovery.

And we really see this

showcased in the consumer sentiment numbers.

So it's a lot of prevent

or preemptive pessimism in the consumer sentiment numbers.

Since December, we've already seen sentiment plummets sort

of 30%, and this is

before the full impact of tariff driven inflation

and real income erosion has even hit the data

or, you know, really hit consumers where they're at,

which is anticipated to occur in about May, June, July.

Now as we, as we sort of set the stage for

where consumers are at

and the general economy at large, we're in a very,

we're in a very sort of insecure vulnerable position.

We have sluggish growth on the horizon, rising inflation,

reaccelerating inflation falling real income levels

because of those factors.

And also a softening labor market

and extreme consumer pessimism.

And in that environment it creates quite a hurdle

for the Federal Reserve

because they're walking a really, really thin, tight rope.

And you know, unfortunately

for the Federal Reserve maybe sort

of been on this thin tightrope since 2020,

and even though the market is pricing in multiple rate cuts

for 2025, expecting the Fed to respond to,

you know, elevated unemployment

or a moderately rising unemployment rate

and softening growth, our outlook is that

that is very likely to actually hold rates steady.

And that's because core inflation is not only anticipated

to be elevated, anticipated to re-accelerate.

So this puts policymakers in a historically familiar, albeit

dangerous position where if they cut too soon,

they risk inflation sort of running away from 'em.

And because of this

and the the risk of sort

of repeating some 1970s monetary policy errors,

you really see the most realistic path forward,

the Federal reserve holding rates constant

and really accepting slower growth,

the moderately rising unemployment rate in order

to get price stability under control.

Now of course this has the negative effect on households

and businesses of, you know, not offering reprieve

to borrowing costs and things of that nature.

Um, but at the same time, the hope is

that you get inflation under control

and don't have a, a much worse monetary

policy crisis on your hands.

Now, all of that to say the economic picture is one

with many pressure points.

As we sort of get into the middle of 2025,

we have a challenging mix of macroeconomic pressures

among slower economic growth, rising inflation,

a softening labor market, and also consumer pessimism.

That's, um, that's quite prevalent through the economy

now in this environment it's exacerbated,

the difficulty is exacerbated by the fact that households,

consumers, businesses, they're all being asked

to make decisions in an environment that is really defined

by volatility, which can be quite, quite tricky

to get right now.

As an economist, it's always my suggestion

to focus on external indicators wherever you

can in your business planning.

Also integrate, you know, the most realistic path forward

for the economic trajectory

and being very adaptable to how this might change

as we make our way through 2025.

Um, I'm also a huge proponent of scenario planning.

What if analysis.

So that should things change, which is very likely

that the economy will continue to be quite volatile

as we get through this year.

There's sort of a playbook

and a path forward so that you're not, um,

starting from zero, but you

have a little bit of a headstart.

Now, we do offer our own solutions

for these problems here at board,

and if you would like to learn more about them, go

to board.com and request a demo.

With that, I just wanna say thank you for your time,

it's a privilege

and I look forward to seeing you again next month.