Weekly Research Briefing: Cracks Forming

The upbeat mood seen among US businesses at the start of the year has evaporated, replaced with a darkening picture of heightened uncertainty, stalling business activity and rising prices.

Optimism about the year ahead has slumped from the near-three-year highs seen at the turn of the year to one of the gloomiest since the pandemic. Companies report widespread concerns about the impact of federal government policies, ranging from spending cuts to tariffs and geopolitical developments. Sales are reportedly being hit by the uncertainty caused by the changing political landscape, and prices are rising amid tariff-related price hikes from suppliers.

Whereas the survey was indicating robust economic growth in excess of 2% late last year, the February survey signals a faltering of annualised GDP growth to just 0.6%.

While overall inflationary pressures remained muted, this reflected a squeezing of margins in the services sector as companies sought to absorb cost increases in order to offer competitive prices amid weakened demand. A concern is the sharp, tariff-related, jump in manufacturing input prices, which will likely either put further upward pressure on inflation in the coming months or further squeeze profit margins among US companies.

@lisaabramowicz1: The Citi US economic surprise index hit the lowest last week since September.

@bespokeinvest: Of the 1,045 words in the commentary section of the Dallas Fed Manufacturing report, the word tariff(s) was mentioned 22 times (2.1%). A few:
"Tariff threats and uncertainty are extremely disruptive."
"The back-and-forth tariff talk has been very stressful, but it has not been disruptive so far."
"There's some trepidation about inflation and tariff impact"
"It is very hard to plan. Interest rates? Tariffs? Wow."

@KevRGordon: Consumers have not been this pessimistic about their household finances in the next 5 years since December 2013

@LizAnnSonders: Consumers’ buying conditions pulled back sharply in February for vehicles (blue), houses (orange), and large household durables (white)

‬@bespokeinvest: Recessions vs. Housing Starts since 1970. A rollover in Housing Starts has historically been a pretty reliable recession predictor.

‬‪@dianeswonk.bsky.social‬: We have two competitive but highly disruptive shocks underway:‬‬‬

1) A surge in uncertainty about the future, which prompts firms & households to delay major spending decisions; and 2) A fear that prices will continue to rise in consumer sentiment, which spurs hoarding, notably of necessities.

The first causes a freezing of action on big investments, which are pro cyclical, while the desire to hoard necessities - think toilet paper during quarantines or eggs today - becomes a self-fulfilling prophecy on inflation and pushed prices up.

Credit spreads have not responded the way they normally do to rising policy uncertainty. Economic policy uncertainty is spiking higher, but credit spreads are not widening, see the third chart. The question is if persistently elevated policy uncertainty will begin to have a negative impact on capex spending and hiring decisions.

Banks have pulled a handful of US leveraged loans from the market this month, as investors are pushing back on aggressive pricing and credits with less favorable ratings, even though demand is outweighing the overall supply of deals.

Four companies that launched loans worth a collective $3.3 billion retreated from the broadly syndicated market in February, according to people with knowledge of the deals. Two of the transactions— a $1.21 billion loan for chemicals company WR Grace and a $773 million deal for oil field services firm US Silica — were withdrawn this past week, said the people, who asked not to be identified discussing private information.

“A lot of the recent deals have been priced on the screws with spreads compressing,” said Michael Marzouk, a loan portfolio manager at Aristotle Pacific Capital. “And with uncertainty out there with tariffs, investors are being selective.”

For months, investors have eagerly anticipated a wave of initial public offerings, spurred by President Trump’s new administration. Since his election victory in November, which ended a tumultuous campaign season, Corporate America and Wall Street have heralded the start of a pro-business, anti-regulation period. The stock market soared ahead of an expected bonanza of deal making.

But the administration’s tariff announcements and rapid-fire regulatory changes have created uncertainty and volatility. Worsening inflation has set off market jitters. And the emergence of the Chinese artificial intelligence app DeepSeek last month caused investors to question their optimistic bets on U.S. tech, leading to a drastic sell-off among A.I.-related stocks.

All that has affected initial public offerings. “The calendar just went from fully booked to being wide open in a span of like three weeks,” said Phil Haslett, a founder of EquityZen, a site that helps private companies and their employees sell their stock...

So far this year, the pace of public offerings is ahead of last year’s, with companies raising $6.6 billion from listings, up 14 percent compared with this time last year, according to Renaissance Capital, which manages I.P.O.-focused exchange traded funds.

Yet there are no signs of the I.P.O. wave that many had anticipated, especially from big-name companies that had spent the past two years waiting to go public. Apart from Turo’s canceled listing, Cerebras, an A.I. chip company that filed its investment prospectus this past fall, has also delayed plans to go public.

US growth is likely to slow in the second half of the year as tariffs, tighter immigration laws and government cost-cutting efforts led by Elon Musk weigh on the economy, billionaire Steve Cohen said.

The Point72 Asset Management founder, speaking at the Future Investment Initiative Institute’s summit in Miami Beach Friday, struck a bearish tone when asked about his outlook. He pointed to sticky inflation, slowing growth and the possibility of tit-for-tat tariffs as drags on the US economy.

“I’m actually pretty negative for the first time in a while,” Cohen said. “It may only last a year or so, but it’s definitely a period where I think the best gains have been had and wouldn’t surprise me to see a significant correction.”

Cohen said US economic growth is likely to slow to 1.5% from about 2.5% in the second half of the year. He was also downbeat on the Musk-led Department of Government Efficiency, calling it an austerity initiative, and said tariffs will hold the economy back.

“Tariffs cannot be positive. It’s a tax,” Cohen said. “And you can imagine tit-for-tat if the US implements a tax on somebody, they’re going to perhaps raise the stakes and raise their tax back.”

@bespokeinvest: The US $SPY has been the worst performing of the G7 country ETFs since Trump re-took office, and it's one of the few country ETFs down over this period. The best since Trump 2.0 officially began a month ago? China $MCHI +19.7%

@EIAgov: "Residential energy expenditures for homes heating with natural gas and propane for the current winter (November through March) have grown, and now we expect them to total 10% more than last winter."

“President Trump has talked a lot about making our U.S. auto industry stronger, bringing more production here, more innovation to the U.S., and if this administration can achieve that, it would be one of his most signature accomplishments.”

So far, however, “what we’re seeing is a lot of cost and a lot of chaos,” Farley says. Ford is looking for ways to build up inventory in the U.S. to deflect the blow of Trump’s tariffs at least in the short term.

Farley is clearly trying to get the attention of policymakers and the media. During the automaker’s year-end earnings call, Farley said, “There’s no question that tariffs at a 25% level from Canada and Mexico, if they’re protracted, would have a huge impact on our industry, with billions of dollars of industry profits wiped out and an adverse effect on the U.S. jobs.

“Let's be real honest: Long term, a 25% tariff across the Mexico and Canada borders would blow a hole in the U.S. industry that we've never seen," Farley said. "Frankly, it gives free rein to South Korean, Japanese and European companies that are bringing 1.5 million to 2 million vehicles into the U.S. that wouldn't be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever."

Stellantis NV is pausing work on the next generation Jeep Compass sport utility vehicle and all activities at its assembly plant in Brampton, Ontario.

“As we navigate today’s dynamic environment, Stellantis continues to reassess its product strategy in North America,” spokesperson Jodi Tinson said Thursday in an emailed statement...

The “unexpected announcement” in Brampton is a matter of “grave concern,” according to Unifor, the union representing auto workers at that facility. It raises doubt about the timeline of the retooling process, the union said.

“The chaos and uncertainty plaguing the North American auto industry, which is under the constant threat of tariffs and a dismantling of EV regulations from the US, are having real-time impacts on workers and corporate decisions,” said Unifor President Lana Payne. “The threats are also dangerous to our economy and to Canadian jobs.”

Unifor said the impact of a delayed start at Brampton would have spillover effects on local parts suppliers tied to vehicle production, including thousands of union and non-union workers.

The European Union estimates that the first wave of Donald Trump’s steel and aluminum tariffs will hit as much as €28 billion ($29.3 billion) of the bloc’s exports in what would be a massive escalation in the US president’s trade war.

The amount of goods — which the EU assesses will include derivative products as well — would be about four times larger than the last time Trump targeted the bloc’s metals sector, according to people familiar with the EU’s thinking.

EU trade chief Maros Sefcovic debriefed the bloc’s ambassadors on Friday after his visit to Washington to meet with his US counterparts. He cautioned that the situation is in flux and the details and the scope of any tariffs could still change, said the people, who spoke on the condition of anonymity.

As part of his effort to rewrite global trade rules, Trump announced a series of duties including 25% tariffs on steel and aluminum exports that could take effect as soon as March 12.

Transformers could become a chokepoint. Only about 20% of transformer demand can be met by the domestic supply chain, according to Wood Mackenzie, which also estimated that transformer prices have already risen 70% to 100% since January 2020 because of inflation for raw materials such as electrical steel and copper. Steel is also an essential component of transformers, and notably, Cleveland-Cliffs is the only domestic producer of grain-oriented electrical steel for them. Assuming that Trump moves ahead with 25% tariffs on Canada and Mexico, and imposes tariffs on copper as well, Wood Mackenzie estimates that transformer prices could increase by an additional 8% to 9%.

Mexico, Canada and China are important sources of electrical equipment to the U.S. In 2024, China accounted for over 32% of U.S. low-voltage transformer equipment imports and Mexico accounted for 36% of high-voltage transformer imports, according to Wood Mackenzie. Canada accounted for about 16% of U.S. imports of high-voltage switchgear and 100% of imported utility poles. Utilities typically go through a lengthy process to test the reliability of transformers they are purchasing and tend to require custom specifications, so it isn’t an easy process to switch to a new supplier, notes Chris Seiple, Wood Mackenzie vice chairman...

But at the end of the day, tariffs will pile new cost pressures on an already-tight grid. Last week, the New Jersey Board of Public Utilities said its residential customers’ average monthly bill is expected to increase by 17% to 20% for the 12-month period starting June 2025, partly due to data center-driven demand growth. Nationwide, electricity prices have increased at a compound annual growth rate of 5.7% over the last five years, a considerable acceleration since the preceding five years when prices were roughly flat, according to data from the U.S. Bureau of Labor Statistics.

Ross Perot Jr., a billionaire Texas real estate developer and longtime Republican donor, said President Donald Trump’s tariff threats are emerging as a “big concern” and forcing business leaders to think twice before approving investments.

The uncertainty is prompting Perot to weigh putting a “tariff line” in contracts for the industrial buildings he develops around the US. In other words, he would offer one price without tariffs and a higher one if Trump follows through on plans to slap trade duties on key goods such as steel and aluminum.

“It’s inflationary and it’s confusing,” Perot said in an interview, adding that he remains a Trump supporter despite his concerns around tariffs because he thinks the new president will be good for business in the long run. “The business community I’ve talked to, everybody’s kind of on hold to figure what the pricing is going to be.”

@carlquintanilla.bsky.social‬: Higher prices for beer, because of tariffs, tops Page One in Ohio.

Amid uncertainty about frozen research aid from the National Institutes of Health, the University of Pittsburgh has put its Ph.D. admissions on ice. The school confirmed Friday that there would be no new Ph.D. offers of admission while Pitt works to understand how reduced federal aid could impact the institution...

The pause applies to all Pitt departments, not just medical and scientific research programs. University leadership is evaluating how reduced funding could impact the school, and it’s not clear when Ph.D. offers will resume.

Pitt is not the first research university to take such a drastic measure as it tries to find its financial footing amid the Trump administration’s first month. The University of Southern California paused admissions in some of its departments last week, according to STAT.

And according to the Vanderbilt Hustler, the student newspaper at Vanderbilt University, a dean at the Tennessee school announced a pause on graduate student admissions last week. The school later told the paper that admissions were not paused but steps were being taken to “balance program admissions with current student needs.”

US government by the numbers… government spending = $7tn, revenues = $5tn, deficit = $2tn (i.e. 7% of US GDP); Trump/Bessent want to reduce deficit from 7% to 3% of GDP; three routes to 3%...

1. 10% nominal GDP growth per annum cuts deficit to 3% of GDP (assuming spending & revenue static), but obviously inflationary and inflation not popular with voters;

2. $1tn rise in revenues…assuming unchanged taxation (and Trump wants tax cuts), leaves tariffs as go-to for revenues; but US tariffs would need to rise from 2-3% (Chart 8) to 30% to generate $1tn in revenue (import duties currently raise $80bn); again big inflation risk, why Trump delaying them, so that leaves…

3. $1tn cut in spending…$7tn government spend currently roughly split $4tn “mandatory,” $2tn “discretionary,” $1tn interest payments on debt; math says to stabilize $1tn in interest payments needs US Treasury 5-year yield to fall below 3.3% from 4.4% (and Fed ain’t cutting), and $4tn in mandatory spending (healthcare, Social Security) politically off limits; so leaves deep cuts in $1tn Defense budget and/or $1tn spent on “government” (Department of Energy, Dept of Education, Dept of Transportation, etc.) as easiest route to lower US deficit.

Buffett highlighted the success of Berkshire’s property-casualty insurance business, which he called the “core” of the firm’s business model. Berkshire’s operating earnings from insurance underwriting jumped 66% to $9 billion in 2024 compared with the prior year.

He pointed specifically to the performance of Geico under CEO Todd Combs, describing the firm’s improvement in 2024 as “spectacular” even though more work remains to be done.

Buffett argued that Berkshire is uniquely suited for the rare financial model of the industry, where payment is received upfront and the true cost to the business is only determined years or even decades down the line.

“Berkshire can financially and psychologically handle extreme losses without blinking,” he wrote. “We are also not dependent on reinsurers and that gives us a material and enduring cost advantage. Finally, we have outstanding managers (no optimists) and are particularly well-situated to utilize the substantial sums P/C insurance delivers for investment.”

@TSOH_Investing: Pre-tax underwriting income at GEICO in FY24 was ~$7.8 billion - equal to the cumulative result at GEICO over the 15-year period from FY95 to FY09

HAYS COUNTY, Texas - The Hays County Health Department was notified about the potential for exposure of residents to a person who tested positive for measles by the Texas Department of State Health Services (DSHS). The person who tested positive for measles is a Gaines County resident who visited San Marcos on Friday, Feb. 14, 2025 from 3 p.m. to 8 p.m. Individuals who were at Texas State University from approximately 3 to 7 p.m. and Twin Peaks Restaurant from 6 to 10 p.m. may be at risk of developing measles due to exposure to this individual.