Financial district recuperates from initial losses, marking an ending to a tumultuous month amidst Trump-related turbulence.
Wall Street's hair-raising Wednesday softened into a calmer evening as US stocks recovered from hefty early losses, continuing their erratic developments amid uncertainty over the impact of President Trump's trade war on the economy.
The S&P 500 climbed 0.1% to extend its winning streak to seven days. The Dow Jones Industrial Average gained 141 points, or 0.3%, while the Nasdaq composite slipped 0.1%.
The dramatic turnaround followed a report indicating that the US economy might have contracted at the start of the year, missing economists' expectations, in a dramatic reversal from the economy's strong growth at the end of the previous year. High tariffs driven by the trade war added to the economic strain.
Such data elevates the specter of a severe situation called "stagflation," characterized by an economy that stands still while inflation remains high. Economists fear this scenario due to the Federal Reserve's limited tools to rectify both problems concurrently. If the Fed were to address one issue by adjusting interest rates, it would likely aggravate the other.
According to Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, "Even if today's weak GDP performance partially reflects companies attempting to outpace tariffs, it serves as a daunting cry for the economy's health."
Immediate inflationary pressures stemming from tariffs threaten to push consumer prices up by 2.3%, translating to approximately $3,800 per household each year. Electronics, consumer goods like video game consoles, food, and apparel, are particularly vulnerable to price increases.
As a result, U.S. GDP shrank by 0.3%, marking the worst performance in three years and contradicting the prior quarter's impressive 2.4% growth. The trade turmoil and labor market strains have disrupted business planning, dampened hiring, and weakened consumer spending.
In a potential stagflation scenario, both persistent inflation and stagnant growth coalesce to create classic stagflation conditions. Risks include a wage-price spiral and supply-chain bottlenecks that may maintain inflationary pressures. The lack of reciprocity mechanisms in current U.S. trade policy exacerbates these vulnerabilities.
In essence, the trade war amplifies stagflation risks by simultaneously compressing economic output through reduced business activity and fueling inflation through consumer price surges. To ward off long-term damage, coordinated fiscal or monetary interventions may be necessary to counteract these twin pressures, a strategy lacking in current proposals.
- The dramatic turnaround in US stock market had a connection with the recent report suggesting a possible contraction of the economy at the start of the year, leading to fears of a severe economic condition known as stagflation.
- As a result of the trade war, high tariffs have strained the economy, adding to the concerns over stagflation, a situation characterized by stagnant growth and high inflation.
- If the US economy is facing stagflation, it would exhibit persistent inflation and stagnant growth, posing risks such as a wage-price spiral and supply-chain bottlenecks, potentially maintaining inflationary pressures.
- The continuing trade war has increased the risks of stagflation by both reducing business activity, thereby compressing economic output, and fueling inflation through consumer price surges, highlighting the need for coordinated fiscal or monetary interventions to counteract these twin pressures.
