US Economy: Weekly Commentary – March 3, 2025.
US Market Review
Treasury yields fell sharply, while stocks posted significant losses, led by small- and micro-cap declines. The US dollar strengthened, and commodities were mixed, with oil and gold falling. Bitcoin dropped 18% in February.

Treasury bond yields have sharply declined over the past two weeks, with the month ending significantly lower by 25-30 basis points on average. The 10-year U.S. Treasury yield is currently trading below 4.22%, reflecting a decrease of more than 50 basis points in just over a month.

Equities experienced notable losses throughout the week, with small- and micro-cap stocks hit the hardest, down 1.45% and 2.30%, respectively. Large-cap stocks fell by 0.98%, and the "Magnificent 7" dropped 4.50%, contributing to a more than 3.5% decline in the Nasdaq 100. Despite this, the financial and real estate sectors posted strong gains, while the technology sector saw a nearly 4% decline.

The U.S. dollar strengthened against the euro, rising by 0.79%. Crude oil (WTI) fell 0.41%, influenced by discussions between the U.S. and Ukrainian presidents, the potential imposition of new tariffs by Washington, and Iraq's decision to resume oil exports from the Kurdistan region. Gold decreased by 2.79%, ending its winning streak, while Bitcoin dropped over 7%, marking an 18% decline for February.
US Market Views Synopsis
Q4 2024 U.S. GDP rose 2.3%. Consumer and government spending drove growth, but inflation, weak consumer spending, and housing struggles signal slower growth ahead.

The second estimate of Q4 2024 U.S. GDP confirmed 2.3% growth, driven by consumer and government spending, although business investment and inventory drawdowns dragged down the overall figure. Inflationary pressures persisted, with the GDP price index revised to 2.4% and core PCE rising to 2.7%, signalling ongoing cost increases. Consumer spending declined 0.5% MoM in January, pointing to weak Q1 GDP growth, with annualized growth projected at just 1.6%. Personal income rose by 0.9%, mainly driven by government benefits and farm income, while core PCE inflation moderated to 2.6% YoY. The housing market faces significant challenges, with falling building permits and weak new-home sales amid high inventory levels and inflationary pressures. Builders are struggling with rising material costs, and the inventory surge suggests potential price cuts may be on the horizon.
GDP
The second estimate of Q4 2024 U.S. GDP confirmed 2.3% growth, driven by consumer and government spending. Inflation indicators rose, highlighting persistent cost pressures amid policy shifts and evolving economic conditions in 2025.

The second estimate of U.S. GDP for Q4 2024 confirmed an annualized growth rate of 2.3%, unchanged from the initial reading and reflecting a slowdown from the 3.1% expansion in Q3. Growth was primarily driven by strong consumer spending (+4.2%) and government expenditures (+2.9%), while business investment declined (-3.2%) and inventory drawdowns subtracted 0.8 percentage points from GDP. Residential investment posted a solid 5.4% gain, and net trade made a modest positive contribution of +0.1 percentage points. On an annual basis, real GDP expanded by 2.8% in 2024, supported by increases in consumer spending, government investment, and exports, despite a downturn in private-sector investment.

Inflationary pressures remained evident, with the GDP price index revised slightly higher to 2.4% and the core PCE price index—excluding food and energy—rising to 2.7%, both reflecting hotter-than-expected price growth. The average quarterly inflation rate throughout the Biden administration exceeded 4.4%, highlighting ongoing cost pressures. While the overall GDP figures remain stable, markets are focusing on the implications of elevated core inflation and potential policy adjustments under the new administration. With trade policy shifts and fiscal measures on the horizon, economic momentum in early 2025 will be shaped by evolving macroeconomic conditions and the Federal Reserve’s response to persistent inflationary trends.

We anticipate sustained inflation driven by Trump’s trade policies, which are likely to exert additional upward pressure on prices. Additionally, we expect slower economic growth in the coming quarters.
Consumer Spending
US consumer spending fell 0.5% MoM in January, signaling weak Q1 GDP growth. Personal income rose 0.9%, while core PCE inflation moderated to 2.6% YoY.

US consumer spending in January showed a notable slowdown, with real spending declining by 0.5% MoM, significantly below the expected -0.1%. This development poses a key challenge for Q1 GDP growth, as even with projected rebounds of 0.4% MoM in February and 0.3% in March, consumer spending growth for the quarter would only reach an annualized 1.6%, the weakest since Q2 2023. Although retail sales had already fallen, potentially impacted by cold weather and the Los Angeles fires, services spending—expected to counterbalance this drop—failed to do so. This suggests the US economy entered 2025 on a weak note, likely reflecting a decline in consumer confidence following President Trump’s election victory in November. Personal income increased by 0.9% MoM, driven largely by a 1.8% rise in government welfare benefits and a 39% surge in farm income, although wages and salaries rose just 0.4%. Consequently, the household savings rate climbed from 3.5% to 4.6%. The Fed’s preferred inflation gauge, the core PCE, rose 0.3% MoM and 2.6% YoY, indicating a moderation in inflationary pressures from December’s 2.9% YoY, marking the lowest core PCE inflation since March 2021.

We expect lower consumer spending due to economic uncertainty and a weak labour market, while inflation may rise as a result of Trump’s policies.
Housing Market
Building permits are declining, while new home sales face high inventory and declining sales, signalling potential price cuts. Builders struggle with high costs, inflation, and stagnant demand.

Building permits have been declining since 2022, though they have consistently remained above the critical 1.4 million threshold. In January, permits were revised down from a modest +0.1% month-over-month increase to a -0.6% decrease, marking two consecutive months of declines. The year-over-year trend also remained negative, with the recent bounce in permits proving to be short-lived. Builders are grappling with a range of challenges, including high material costs, which are still about 40% higher than pre-pandemic levels. These cost pressures, combined with inflation and rising mortgage rates, continue to dampen permit activity and suggest a cautious outlook for the housing market.

New-home sales began the year sluggishly, with a 10.5% MoM decline to 657,000, well below the consensus estimate of 680,000, indicating a stunted recovery. Inventory levels have surged to near 2007 levels, with the current inventory now nine times greater than the average monthly sales, suggesting it would take approximately nine months to sell the current stock at the prevailing sales pace. Despite the sales decline, the median sale price for new homes rose 3.7% YoY, driven by an increase in high-end home sales. The widening gap between rising inventory and declining sales suggests that price adjustments may be imminent. Builders are navigating a challenging environment with stagnant sales and an economic backdrop marked by persistent fiscal deficits, presenting considerable headwinds moving forward.

We do not expect a short-term recovery in the housing market, with a slight recovery likely at the end of the year. Mortgage rates are around 7%, and slower construction will continue to pressure affordability and limit market growth.
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