Monthly Macro with Richard de Chazal—March 2025

William Blair macro analyst Richard de Chazal discusses the juxtaposition between weak consumer sentiment and solid economic data, exploring whether a recession is imminent and the implications of shifting inflation regimes, fiscal policy dominance, and ongoing tariff uncertainty.

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Podcast Transcript

00:23
Chris T
Welcome back everybody. It's March 31st, 2025. And I am joined by William Blair macro analyst Richard de Chazal for another episode of Monthly Macro. Richard thanks for joining.

00:34
Richard D
Great Chris thanks. Nice to be back.

00:36
Chris T
So macro-economic news has of course been nothing short of exhausting to keep up with lately. So, I imagine your role has been quite interesting as of late. That said, figure we take some time to talk through some of the bigger stories from these past few weeks. Starting first with the juxtaposition between weak soft data, you know, so things like consumer surveys, sentiment indicators and expectations and then what has been relatively solid hard data, which, you know, includes things like overall GDP, employment, retail sales and manufacturing output. Which data do we believe? Or maybe a better question is, are we heading for recession? Figured that would be a good first question.

1:18
Richard D
Yeah. Let’s just lay it out there. I mean, yeah, this is definitely a hard question that I'm getting a lot from clients. You know what's going on with the consumer sentiment data or consumer confidence. You know, is this going to be followed up or is the weakness there going to be followed up by a collapse in actual spending?

So, just to sort of clarify, there are two main surveys that we tend to follow in financial markets. That's a conference board survey of consumer confidence and the Michigan Survey of Consumer Sentiment. There are others, but those are kind of the main ones. And this is sort of the soft data. So it's survey data of individuals or companies as opposed to the hard actual data on production or new orders or spending. So, it's kind of step one, as it were. You know, are companies talking the talk or are individuals talking the talk. Are they actually walking the walk in terms of are they following through on what that sentiment is. And the concern is clearly that we've seen, you know, pretty sizable weakness in this soft data. So consumers are telling us they're feeling a lot worse about the economic situation. Is that going to be followed up by weakness in actual consumer spending, which would obviously be a lot worse for the economy.

And I think we can say a couple of things here is, you know, first is that the consumer survey data, it doesn't track actual spending perfectly on a month-to-month basis, but it definitely tracks it on a trend basis.

So I mean, that I think makes perfect sense, you know, if consumers are increasingly pessimistic about the economy, they're going to start pulling back and spending less.

So far, that hasn't really been happening yet. So maybe there's some cognitive dissonance going on there. But that hasn't really showed up in the spending. And then the second part is, you know, will it?

And I think if you drill into the data bit, that's a little bit helpful in the sense that you can see that the sentiment indices are broken up into present situation and expectations about the future. And most of the weakness has really been in those expectations component as opposed to the present situation component.

So consumers are worried about what might happen, say, because of tariffs or the Doge or geopolitics. They're not necessarily seeing it right at the moment. What's also interesting is that just about all of the weakness has been to due to a collapse in the respondents who consider themselves to be Democrats, as opposed to Republic. And so if you break up the confidence levels into Democrats and Republicans, Republicans has been shooting up and just kind of may be peeking out and starting to turn down a little bit.

But the sentiment amongst, people who identify as Democrats has been terrible. And that's what's really been weak. So I think that's it takes away a little bit of what some of the messages from, you know, just staring at the headline number. I think what's also interesting is that, you know, in terms of consumers behavior, they're definitely doing something, what they call buying in advance. So they're trying to front load tariffs and get ahead of those by buying now, which may also mean we get a little bit of weakness further down the road because of that.

And I think what's also important is what we're not seeing. And this kind of gets to maybe sort of the recession part of your question is we're not seeing any major layoffs in the private sector right now. So sentiment is weak, but really, to have a recession, you need to have quite weak employment data. And initial jobless claims, they're still incredibly low. Companies, you know, they officially, if they're going to do mass layoffs, they have to issue what's called WARN notices or WARNOT notices. They haven't really been doing those, those are still really, really low. Interestingly, some two reports out by some of my other colleagues in research, Tim Mulrooney and Andrew Nicholas, they cover, staffing companies and uniform rental companies. So the companies that kind of have a good feel for the employment situation, and they were saying last week from the perspective of those companies, the macro is still kind of okay. It's still holding in there. They're not seeing big deterioration yet.

But I think what it has done, well at least the tariff situation, has kind of decreased the visibility a bit. So you know, that's increased uncertainty. And I think what companies are doing is they're not laying off workers yet, but they're hiring less. So, you see job openings have started to or continue to come down. Small businesses are seeing the same thing.

So I think the bottom line is that, you know, the sentiment is poor. That should be consistent with slower rate of spending going forward. But a major recession is not the base case scenario right now. And I think to have that, you'd have to have some combination of very tight fiscal and very tight monetary policy or big surge in energy prices, or maybe some big balance sheet excesses on the consumer side or the corporate side that kind of needed to. Or maybe you had some forced deleveraging around that and none of those are we really seeing it at the moment.

7:23
Chris T
All right. Well so Powell at the last FOMC meeting seems pretty dismissive of the soaring inflation or inflationary expectations data from the University of Michigan. You know, a kind of a PTSD flashback. We even heard the term “transitory” thrown out there again. Is he just is he picking and choosing the data that suits the Fed best, or should we be more concerned about those expectations data than the Fed seems to be?

7:50
Richard D
Yeah, so, again, maybe just for the listeners who are not, you know, up to date on the latest consumer expectation inflation data. I think what we have been seeing in the last couple of months is that measures of inflationary expectations have been shooting straight up, and the survey data here again. So again, this is soft data as opposed to hard data. So it's expectations of inflation, not actual inflation. And the main index here is again the University of Michigan Survey, which has a very respectable survey and has a very long, long time series back to the early 1970s, I think, or late 60s. But those expectations say for one year ahead have gone in December when they were 2.8. Now they're 4.9. So that's a really big jump. And then the Fed tends to put a lot more weight on the longer-term expectations. So, what do consumers think inflation will be over the next 5 to 10 years. And we've also seen a bit of a jump there. So those rose from 3% to 3.9% today. So that's consumers saying they don't really believe that the Fed is going to be anywhere near its 2% target in the coming decade. Again, according to that Michigan survey.

And why these numbers are so important is because in economics, there's, you know, a behavioral element there. So if consumers think prices are going to rise, maybe they'll do more buying in advance, which is what we're seeing, as I just noted. And maybe, you know, that also starts to cause workers to maybe demand higher wages and salaries, and then companies in turn start to want to try and push prices higher.

So, you get this kind of wage price spiral kind of coming into play. And that can help to give a near-term boost to inflation. And I think the second reason we pay so much attention to these softer survey datas of consumer expectations. Even if you don't, as some economists don't put any weight on them. But I think, you know, we kind of have to follow them, even if you don't necessarily believe the economics behind them is simply because the Fed think they're so important.

So whether you like it or not, doesn't really matter as long as the Fed thinks they're important and the Fed then uses them in their reaction function, which then financial market participants assume the markets need to follow and find them important as well.

So, you know, getting back to what Powell said, about the increase is, again, according to the Michigan survey, these are what you could describe as being sort of unanchored expectations, which is what the Fed fear most.

But why do these sort of kind of shrug them off? I think he was basically saying, you know, we're watching the data very closely, but we're also not seeing similar increases across the wider swath or swathe of, of economic indicators. So the New York Fed have their own one year inflationary expectations measure. Those are, you know, picked up a tiny bit but still sort of 3.1%, which is which is kind of fine.

And then he's also, Powell was also talking about what's happening in the TIPS market. So you have survey based inflation and then you have market based, inflation. So what are Treasury inflation protected securities telling you. And you can sort of back that out from how much investors are willing to pay for, Treasury securities that are indexed to inflation versus actual nominal Treasury securities. And that can tell you what the market expects inflation to be.

And again, not really pricing in any big increases. So, they're still showing inflation, particularly over the five years from now. So this is one area the market really likes to focus is the five year tips which is kind of saying, you know, if we get rid of all this near-term noise, what's the real trend rate of inflation. And that the market is still saying, you know very much that this is you know, nothing's changed. It's still kind of 2%, 2.5%. So I'll give some credit to the Fed here. And, you know, while, you know, they do have a bit of a history, of being kind of picky and choosy about what data they use to suit what narrative, I think this time around, with tariffs being hopefully transitory or the impact kind of transitory, it's not too much money chasing too few goods, the Fed is kind of right to say let's, let's just wait and see and not get too caught up in one survey yet. And let's see what's pushing into the other data.

13:10
Chris T
So you've written recently about three major regime changes that are currently taking place. They are shifting the inflation regime from demand driven inflation to supply-shock driven inflation, a shift in the policy regime from monetary policy dominance to fiscal policy dominance, and then a shift in the structure of investment from a concentration on cheap and abundant labor to more emphasis on capital investment.

We talked a little bit about the change of the inflation regime last month, but we didn't get into the change of the monetary policy to fiscal policy or regime change and what that might mean for financial markets and interest rates. Let's do that now, if you don't mind.

13:47
Richard D
Sure. Yeah. So we talked a little bit about it last month and then, and then actually I had a report out, that's on the William Blair website called, Making Active Great Again, which kind of outlines all of these, which I think, you may get a deeper view than what we can present here, but I think, you know, the basic view on the inflation regime was that, you know, inflation risks are now a little bit more balanced, maybe a little bit more tilted to the upside than over the last kind of 2 to 3 decades.

They've been very much tilted to the downside. So inflation could be a little bit more volatile. And because of that I think the Fed is going to have to be a little bit more reactive in monetary policies decisions as opposed to proactive in sort of cutting rates anytime they see a wobble in the markets or whatnot.

And I think, you know, that could mean that maybe rates stay a little bit higher for longer and maybe not as quick to come down. And so that's the inflation, regime change. And there's more to it than that. But the second thing I think is pretty important, particularly, you know, what we're seeing going on now is this kind of dynamic change between, the monetary policy dominant world to a fiscal policy dominant world where, you know, it's no longer the Fed that's driving the bus on policy. It's really fiscal policy makers that are, you know, pushed the Fed into the passenger seat. And they're what's, you know, making policy changes, right now.

And I think what that means is that the Fed is, again, necessarily more reactive. Powell basically told us that at the last FOMC meeting where all of a sudden, the Fed can't, you know, react as quickly as they would like to normally have done. So if we've seen the economy slowing a bit, the soft data coming down, the Fed could sort of issue these kinds of, rhetoric, jawbone the market a little bit, you know, buoy us up about future tax cuts. But now he's sort of saying, well, we've got to wait and see what happens to the tariffs to the DOGE, to the tax cuts to deregulation, geopolitics.

You know, all this stuff is what's moving the economy and moving markets at the moment. And the Fed has to respond to that. Right? So what's happening in Washington. So it's no longer the Fed doing it on its own.

And I think for financial markets this makes things a little bit more difficult as well. I think because for us, you know, central bankers are essentially technocrats. You know, they're independent. And what's important is the transmission mechanism for monetary policy decisions goes through financial markets. Right?

So the Fed, that's why the Fed has to have a very good line of communication through to Wall Street and financial markets to effect the changes in the real economy that it actually wants to make. So, the Fed becomes very attuned to how financial markets think. And then they give us tons of forward guidance on what they're thinking because they play around with that. Financial markets investors understand that Fed reaction function very well. And we have a very good idea around, you know, what happens or what the Fed's reaction function is, to certain data points. And what happens if the Fed raise, you know, rates or lower rates by 25 or 50 basis points.

And then we have pretty diverse parts of the financial markets, the futures markets that can hedge against those risks of those policy outcomes. So, for on a monetary policy dominant world, there seems to be more risk as opposed to uncertainty. And with fiscal policy driving the bus, I think it's kind of the opposite. So the transmission channel for fiscal policy decisions doesn't run directly through financial markets. It kind of mainlines it straight through to Main Street.

So the communication process for Washington can almost ignore Wall Street as the changes that it's making are say, to tax cuts or spending for corporate or the household sector. They don't need to be so attuned to what financial markets are saying as long as they have a good idea, obviously, of what those impacts, you know, what those impacts will have on the economy.

But unfortunately, that's not always clear, because those fiscal policy changes are also kind of hard to forecast. So fiscal multipliers are all over the place. They're not constant. They depend on, you know, how the economy's doing at any one point in time. So, it's harder for investors to get a grip on that.

So, where investors I think thrive on uncertainty. You know risk remember is really what financial markets are all about. You know it's what adds liquidity to the market. You think rates are going to go up I think they'll go up more or less than that. You know we can make a market here. But with fiscal policy some of this stuff is just so uncertain I think investors say, well, I can't possibly price that risk. So I'm going to do nothing. And that uncertainty pulls liquidity out of the market. So, whereas, you know, monetary policy dominance and lower inflation kept rates lower for longer and pushed investors further out along the duration curve, in today's world, I think with fiscal policy and more uncertainty, that kind of reduces a little bit of the duration where investors can go.

I think it makes the decision to put all your money into a big passive ETF a little bit more questionable. And I think it starts to make active portfolio management a lot more attractive once again. I think, you know, investors will necessarily start having to think a little bit more about things like valuation, about portfolio construction, rather than just dumping it into a tracker that eventually or inevitably turned out to be very sort of heavily weighted and funneled into Mag 7 stock.

So bottom line is that, you know, less clarity on policy probably benefits more stock picking, more diversification. I think that also helps areas of the market that have been kind of ignored for a while, like small and mid-cap stocks, where you actually have, you know, a good margin or cushion, in terms of valuation and quite an interesting, narrative there.

21:31
Chris T
All right. So we’re going to have to start wrapping this up, but I think one last question that we have to ask is, you know, of course, about tariffs. And, you know, we're recording this before Liberation Day, which is on April 2nd, again today is March 31st. What's the big picture here? What's going on? Where is this going I guess would be my question.

21:51
Richard D
We can make this a short answer. Yeah. Just more uncertainty. I think for the moment I think, you know, again, markets I think markets can happily deal with tariffs in the sense that, you know, if you say we're going to put tariffs of on all foreign products, 10% or 20% for the foreseeable future, that's fine.

I think markets can then go along okay. We know we have some certainty there. You know, we can maybe raise prices of you know, at least a fraction of that. Maybe our margins will take a little bit of a hit on margins. Maybe we can find some carve outs or some exemptions or you know, actually reshoring and setting up factories back in the States, which I think is the ultimate goal of what this is.

But I think, you know, if you, if you listen to company surveys or read the surveys, what they keep coming back with is saying, and what they're afraid of is that they don't want to go set up a new plant in the US or Mexico or Canada or wherever. And then the tariff decision gets walked back a week later, or a month, or even a year or two later. You know, that costs money. And they need they need clarity.

So I think the question is still, you know, when it comes to these and I don't know if we're going to get this on Liberation Day, but are these tariffs just a negotiating tool? Is this “Art of the Deal.” Is this the, you know, start at the extreme end with big tariffs and then roll them back as we make some concessions. Or some countries make concessions with the US. And then, you know, we can sort of reciprocate with, lower tariffs.

Or are they, are they permanent and hasn't quite been clear. Trump has sort of kind of said both. And I think the other important question is if these are a negotiation tool, then you can't count on them as being a revenue raiser for the extension of the 2017 tax cuts. And those are estimated to cost around $5 trillion.

So, you know, this is a bit of a fiscal cliff that we're heading towards later this year. And from what I gather in Washington, you know, amongst the Treasury Department is what is very rapidly becoming the number one priority for the Treasury is extending these tax cuts, before you get to this, fiscal cliff.

So again, you know, if tariffs are permanent, that's fine. And you can use some of that revenue to pay for that, but then you can't count them. You can count them as revenue. But if they're a negotiating tool, you can’t. So again, risk is fine. We can deal with risk. We love it. Uncertainty not so much.

24:58
Chris T
All right. Well, think that's a good place to stop. Richard thanks for joining. Always a blast chatting with you. Let's do this again next month. And otherwise thank you everybody else for taking the time to be with us. We'll talk soon.

25:08
Richard D
Thanks, Chris.