Payden & Rygel: Mid-year Macro Outlook Update 2015
On December 19, 2024, we published our 2025 macro outlook, titled 'Profiles of the Future'. In it, we outlined our 2025 expectations for continued economic growth, a slowing labor market, moderating inflation, and dovish central banks lowering interest rates. The first half of 2025 was a rollercoaster ride in financial markets, with global trade policy uncertainty surging to its highest level since 1985. However, as markets digested the trade shock and negotiations began, economic policy uncertainty subsided from its peak in April, and markets completely retraced the trade shock sell-off. With the first half of the year behind us, below we grade our 2025 outlook so far and update as needed for the second half of the year.
Macro Call #1: Inflation would moderate
After a 'hot' start to the year in January, core inflation measures cooled over the last three months. The monthly core PCE inflation reading in the previous three months averaged 0.14%, the slowest pace in the current disinflation cycle.
Macro Call #2: Growth continues, but not at the pace put forth by the optimists at the beginning of the year, nor a contraction as feared by most after April 2nd
We expected continued, trend-like growth to start the year, not a Trump-driven acceleration of above 2% growth as some forecasters had predicted.
As the year progressed, trade and fiscal policy surprises quickly led to a deterioration in growth expectations. Again, we’ve preached calm.
For example, investors feared that layoffs and Federal spending cuts would derail U.S. growth. We also counseled that DOGE was overhyped. As it turns out, the DOGE process resulted in just $9.4 billion in “rescission" cuts being submitted to Congress, or merely 0.14% of total Federal spending in FY 2024. Federal employee layoffs have ebbed since March, and Federal spending in FY 2025 is on track to beat 2024 by 25%.
Then, with the tariffs announced on April 2nd, some famous analysts and pundits deemed a recession 'inevitable', or at least placing 'a 95% chance' of one occurring in 2025. We acknowledged the rising risks to growth as tariffs impose a nasty 'tax' on businesses and consumers, but we still thought the U.S. could avoid a downturn in 2025. We pushed back against concerns that negative consumer sentiment would drag growth as much as forecasters had touted, and advised that a solid labor market would still support consumer spending.
Since then, cooler and calmer heads have prevailed, both in Washington (through negotiations, reductions, and a tariff pause) and among analysts.
While headline GDP contracted due to a drag from surging imports, underlying GDP growth expanded at a slower but healthy pace in Q1 after controlling for volatile components, such as trade and government spending.
Macro Call #3: The unemployment rate could rise above 4.4%
The unemployment rate remained stable at 4.2% at the start of the year and fell to 4.1% as of June. However, job growth has slowed. So, what gives?
A shrinking labor force has kept the unemployment rate steady even as hiring has slowed somewhat. Labor force participation rate is declining due, at least in part, to immigration restrictions and deportations. But even before deportations began, labor force growth was already slowing.
Macro Call #4: Rates would move lower in 2025
U.S. monetary policy remained restrictive at 4.25-4.50% for the first half of the year, as potential tariff threats and a stronger-than-expected labor market kept the Fed on the sidelines.
However, despite the monthly volatility, falling growth expectations drove both the 2-year and 10-year Treasury yields lower year-to-date.
Globally, the story has been one of disinflation as well
