Consumer confidence also dropped by seven points in February, recording the largest monthly decline since August 2021 as pessimism about the future returned. The number of consumers planning a vacation in the next six months plummeted by 6%, the largest monthly drop outside of the COVID-19 pandemic. Reports also show that corporate capital spending plans have started to reverse as uncertainty on the economic outlook grows.
As of March 20, the American Association of Individual Investors (AAII) sentiment survey bearish sentiment has exceeded 50% in four consecutive weeks. That level of pessimism in any given week is relatively uncommon, but it is very rare for investors to be so negative in four consecutive weeks. Only twice since 2009 has bearish sentiment exceeded 50% in four straight surveys.
Notably, the AAII investor sentiment survey is commonly seen as a contrarian indicator, meaning the stock market tends to perform very well following periods of elevated bearish sentiment.
Short-term Pain for Longer-term Gain?
The Trump administration is urging markets to overlook the short-term pain of deficit cuts and potential tariff consequences, focusing instead on the expected boost in small business spending, domestic manufacturing, and capital investment. As Treasury Secretary Bessent pointed out:
“Wall Street can continue to do fine. But we have a focus on small business and the consumers. So we are going to rebalance the economy. We’re going to bring manufacturing jobs home.”
For now, these anticipated benefits appear to be overshadowed by the immediate effects of deficit reductions and tariffs.
Meanwhile, in the 2024 fiscal year, the U.S. government recorded a fiscal deficit of $ 1.8 trillion, marking the highest deficit ever for a year without an economic crisis or recession. Furthermore, the fiscal deficit for 2025 has already surpassed $800 billion and is expected to reach $1.9 trillion by the end of the fiscal year.
Tax receipts have made up a consistent percentage of GDP for over 50 years, in stark contrast to government spending, which has not remained stable. As stated by the new Treasury Secretary, Scott Bessent:
“We do not have a revenue problem in the U.S. We have a spending problem.”
Concerns about slowing growth increased over the month, as trade policy uncertainty rained on the parade of continued economic expansion. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.8 percent on March 28.
A key reason for the sharp decline was a notable increase in U.S. trade deficits as imports surged to avoid forthcoming tariffs. Notably, a substantial portion of import gains was driven by the movement of gold from Europe to the U.S. to avoid tariffs.
DOGE Saves Over $100 billion Already
The Trump administration has made it clear that a primary objective is reducing the fiscal deficit. To promote government accountability and efficiency, the new Department of Government Efficiency, referred to as DOGE, was created to implement focused oversight and reform. DOGE reports that its initiatives have already saved over $100 billion for the government.
While DOGE’s methods have sometimes been unconventional, they often involve controversial decisions. For example, it offered a “deferred resignation” option, which approximately 75,000 federal employees accepted in exchange for up to six months of paid leave.
Furthermore, it let go and then re-hired essential staff at the Department of Agriculture to oversee the federal response to the current bird flu outbreak in the U.S., simultaneously freezing nearly all funding from USAID.
The current administration aims to reduce the deficit and to extend the Tax Cuts and Jobs Act beyond its scheduled expiration at the end of 2025. It has also proposed eliminating income taxes on Social Security benefits, overtime, and tips, reducing government revenue by $1.8 trillion over the next ten years.
Achieving these objectives requires curtailing government spending to keep longer-term interest rates contained, hoping to sustain the current economic expansion.
The administration is urging markets to look past the immediate challenges of deficit reductions and tariff effects, emphasizing the potential increase in small business spending, domestic manufacturing, and capital investment that could follow. Markets will need to see enough evidence and be convinced that this strategy is effective; however, in order for larger disruptions to be kept in check.
David Rosenstrock, CFP®, MBA, is the Director and Founder of Wharton Wealth Planning. He earned his MBA from the Wharton Business School and B.S. in economics from Cornell University. He is also a CERTIFIED FINANCIAL PLANNER™.