Viewpoints: 2025

The Federal Reserve Bank of Philadelphia’s state coincident indexes continued to be on the soft side in January (February numbers will be released on April 9). In the one-month changes, Montana led with a .66 percent gain, while West Virginia and South Carolina had increases above .5 percent. 13 states registered declines, none greater than North Dakota’s .34 percent. Over the three months ending in January, only two states (Missouri and Wyoming) were down, both by small amounts. The gains were also somewhat muted, with only five (South Caroilina, Washington, Idaho, Utah, and Maryland) showing increases above 1 percent, topping off at South Carolina’s 1.35 percent. Over the last twelve months, three states were down, and eleven others saw increases of less than one percent. No state had an increase higher than four percent, and only three were higher than three percent. Washington’s index rose 3.66 percent, while Michigan was down 1.34 percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .61 and 2.41 percent. These both appear to be roughly in line with the state numbers.

Malaysia’s business cycle indicator assessment doesn’t make cheerful reading. Among eight Asian countries in our analysis, Malaysia’s overall indicator score ranks second lowest, just above Indonesia.

The profit cycle remains in a downswing. Since 2015, the return on equity for listed companies has stayed below the pre-pandemic (2013–2019) average of 10.8%. However, returns have improved for the second consecutive year, reaching just under 10% in 2023. Corporate balance sheets remain healthy, despite modest declines in cash flow and retained earnings per share. The credit cycle has yet to turn, with the two-year real cost of borrowing rising to 2.8%, exceeding the upper 2% threshold—an indication that monetary policy remains tight.

That said, Malaysia is in a stronger position than Indonesia, and we are overweight on Malaysian equities. The stabilisation of the profit cycle signals that the Malaysian business cycle is approaching a sustainable upswing. The key reason for our overweight stance this year lies in Figure 1.

As the Trump Administration moves forward with tariffs on a range of imported goods, it is useful to establish a benchmark for the potential inflationary effects of tariffs. To do so I modeled the impact on the price index for domestic demand plus exports of a 10% tariff on all imported goods, one proposal of then-candidate Trump.

First, some historical context. Chart 1 shows the average tariff rate on goods since 1929 and, for 2025, the rate implied by a new 10% tariff on all imported goods. Under the proposal, the rate jumps from 2.5% to 12.5%, a level not seen since the Great Depression, reminiscent of the infamous Smoot-Hawley tariff of 1930, and undoing decades of negotiations to reduce international barriers to trade.

Recent company earnings calls and sell-side analyst reports suggest heightened uncertainty and an unusual degree of hesitation among market participants regarding the future macroeconomic and geopolitical environment. In contrast, financial markets—as embodied by aggregate asset prices—must continuously express a view, even in the face of profound ambiguity.

Currently, the market appears to have revised its expectations in three key ways. First, growth expectations have declined markedly: our cross-asset growth factor implies that US GDP growth priced into markets recently fell from above 2% to effectively zero. We note in pasting that the Atlanta Fed’s latest Nowcast for GDP growth in Q1 is still negative. Second, inflation expectations have nudged higher. Third, there has been a modest upward revision in the expected cost of capital.

State labor markets were again generally little-changed in February, though three states (Missouri, New Jersey, and Ohio) had statistically significant increases in payrolls; moves in all others were not significant., though in some cases were up or down by more than 10,000. The sum of payroll changes among the states was well under the national result (88,000 vs .151,000). The January numbers now show a loss of 4,000 jobs when the state figures are summed, which is very much under the nation’s 121,000 increase. There are any number of reasons why the summed state result will differ from the nations, not only different seasonal adjustment factors, but also different base quarters for benchmarking the not seasonally adjusted figures.

Florida was the only state to report a statistically significant change (up .1 percentage point) in its unemployment rate. The highest unemployment rates were in Nevada (5.8%), California (5.4%), DC (5.4%), Michigan (5.4%), and Kentucky. Montana, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 1.9% was again the lowest in the nation.

Puerto Rico’s unemployment rate was unchanged at 5.4% and the island’s job count inched up by 100.

Trump's tariff theory suggests that by placing substantial costs on imports, it can alter the competitive dynamics in manufacturing, especially in the automotive sector. However, he and his economic team are mistaken. The transition from being a net exporter to a net importer is a typical evolution of a mature industry like the automotive business. American prosperity has historically been fueled by creating new products and technologies and importing other goods that others produce more cheaply. Trump's tariff policy will not lead to better balanced growth or an increase in manufacturing jobs; instead, it will raise costs and harm American companies and consumers.

Half a century ago, US companies dominated the motor vehicle industry, with General Motors, Ford, and Chrysler, the big three, making up about 70% of total sales. Currently, only two of these companies remain, and their market share has dropped to less than one-third, despite significant direct and indirect support from the federal government over the past several decades.

The US experiences a trade deficit in motor vehicles with both high-wage countries like Germany and Japan, as well as low-wage countries such as Mexico and South Korea, including those with which it has a free trade agreement.

The transition to becoming a net importer of U.S. motor vehicles aligns with the product life cycle theory proposed by economist and Harvard Business School professor Raymond Vernon. His theory suggests that products are initially developed in countries with capital, demand, and income. Eventually, as production and technologies become standardized, they are adopted or replicated in other regions, leading the country that originally created the product to become a net importer. This is a common outcome—consider the product life cycles of cars, computers, televisions, textiles, and so on.

Attempting to reverse this strong trend would lead to economic disruption, be extremely costly, and possibly the greatest disappointment is that it won't generate additional manufacturing jobs.

In the early 2000s, I published a study on global manufacturing employment in the largest 20 largest economies. My research discovered that from the mid-1990s to the early 200s over 22 million manufacturing jobs were lost, and the biggest decline occurred in China, with a net loss of 16 million manufacturing jobs. Since that study was published the US lost another quarter of its manufacturing jobs but so did other countries.

The study on manufacturing employment should send a straightforward message to Trump's economic advisors: improving the manufacturing sector is done by increasing production and quality with new technologies, rather than by elevating costs. Over the past 20 years, manufacturing output has grown by more than 40% with fewer jobs.

Trump's tariff policy is expected to increase costs and raise the prices of both new and used vehicles, without necessarily boosting production or job creation. In essence, it will do more harm than good, and if fully implemented, it could certainly end America's exceptionalism.

Private credit involves nonbank financial institutions direct lending to private firms. It is a rapidly growing sector of the financial markets. According to McKinsey & Company, private credit “totaled nearly $2 trillion by the end of 2023, roughly ten times than it did in 2009”. Private credit increased in popularity following the Great Financial Crisis after which commercial banks came under increased regulation. But US commercial banks have steadily become involved in the private credit market indirectly. Banks have done this by increasing their lending to nonbank financial institutions, the institutions that make the direct loans to businesses.

Chart 1 shows the steady growth in commercial bank lending to nonbank financial institutions starting in 2015 (when the series first became available form the Federal Reserve). In January 2015, commercial bank loans to nonbank financial institutions were 4.2% of commercial banks’ total loans and leases. By February 2025, this percentage had risen to 9.4%.

State labor markets were generally little-changed from December to January, but were arguably a bit on the soft side. Four states (Georgia, Indiana, Missouri, and West Virginia) had statistically significant declines in payrolls; moves in all others were not significant., though in some cases were up or down by more than 10,000 (very remarkably, California’s job count was reported at 18,032,400 in both December and January).

Pennsylvania was the only state to report a statistically significant change (up .1 percentage point) in its unemployment rate. The highest unemployment rates were in Nevada (5.8%), California (5.4%), DC (5.3%), Kentucky (5.3%) and Michigan (5.3%)—due to the annual revisions, in some cases the rates look substantially different than the initially reported ones for December (Michigan, for instance, its December rate changed from 5.0% to 5.2%, while the December rate in Illinois moved from 5.2% to 4.9%). Montana, Nebraska, New Hampshire, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 1.9% was the lowest in the nation.

Puerto Rico’s unemployment rate was unchanged at 5.4%--unusually, lower than the state rate--while the island’s job count moved up by 2,800.