“Anyone can err; but only a fool persists in error.”

-Cicero, Philippics XII.5

Quo Vadis

The Great Fire of Rome eviscerated the Eternal City in July 64 ACE during the reign of the Emperor Nero. When we think of Rome, we tend to picture it in terms of a Hollywood set: tall, gleaming marble structures, seemingly invulnerable to flame. In fact, it probably looked more like a Favela, and its closely built, wooden, multi-level structures (insulae) would have made for a terrific conflagration. Fires were not an uncommon occurrence in such a city, and engulfed parts of the crowded metropolis with some regularity, perhaps as often as every five years or so. Caesar Augustus founded the first municipal Fire Company in 22 BCE, and chartered Watchmen in 6 ACE to guard against fire through both prudential and ad hoc activities.

But the Great Fire was another matter entirely, as it burned intensely and widely over the course of many days, stopping and starting again at least once, and laid waste to 10 of the city’s 14 districts before being exhausted. The classical authors are at variance as to the cause of the fire and Nero’s ultimate culpability for it. His harsher critics claim he had the fire set so that he could clear and rebuild the city, and that he played the lyre and recited poetry while it raged. Others claim that he was absent at the time of its start, and upon returning would direct bucket crews in a vain attempt to extinguish the crepitating flames.

In the aftermath of the fire, Nero increased the taxation of the Roman provinces to finance the reconstruction of the city—including an extraordinary imperial palace, the Domus Aurea, or the Golden House1. Additionally, he debased Rome’s gold and silver coinage2, an act which surprisingly doesn’t seem to have increased inflation3 but perhaps contributed to nascent assassination plots among the Senatorial elite. These allowed him to rebuild the city and rationalize its plan to a certain extent, which remains evident all these centuries afterward.

Nero, looking for a scapegoat on whom to blame the fire, eventually found one in an obscure Jewish sect, perhaps the same followers of one prior troublemaker Chrestus. These he exiled, tortured and executed. A bit of a populist himself, he certainly understood the value of blaming the Other for the misfortunes of the people.

Perhaps Nero wasn’t as terrible as we are led to believe by the historians and early Christian sources—or, at least, was only as bad as any of his peer Julio-Claudian masters-of-the-world were. Perhaps he didn’t start the Great Fire, and perhaps he did attempt to save the city from destruction. However, the commonplace of an Emperor at leisure in the midst of crisis is handed down to us through the Classical tradition in this motif, of Nero playing the fiddle while the greatest city the world had ever known went up in flames.

Pessimistic Soft Data Lead Deteriorating Hard Data

Forward-looking indicators have been uniformly bad. Over the last several years it was common for sentiment and confidence indicators to belie the state of the economy. We are reminded of the University of Michigan’s Survey of Consumers in which Consumer Sentiment in June of 2022 registered its lowest ever reading of 50—worse even than in the depths of the 1980 recession. At that time, real GDP growth was recovering from a 1% contraction in the first quarter and making its way to a 3% expansion in the third quarter. So, it is best to take the soft data with a leavening of hard data. Nonetheless, the rapidity of the shift has been impressive.

Manufacturing

The Empire State Manufacturing Survey of General Business Conditions, which canvases CEOs in manufacturing in New York, registered a slight improvement in current conditions, but a deteriorating in expected conditions. This diffusion index indicates that most respondents felt that current conditions have gotten a bit better, while their forecasts for the future got quite a bit worse. The Philadelpha Fed Manufacturing Business Outlook Survey showed a similar decline in expectations about future activity, but its current activity index fell markedly, though to a level still above recessionary territory. As this is the section of the economy that the current administration hopes to make great again, this is not exactly a full-throated endorsement of proposed industrial policy.

New Orders for Durable Goods were up in January but were down on a quarterly basis. The trend is lower, but probably received a recent expansionary impulse as businesses attempt to front-run tariffs. Waning demand for large-ticket purchases portends weakness ahead.

Merchant Wholesalers Total Inventories are also down on a three-month moving average basis and reflect a state of falling inventories. To an extent, January’s increase in New Orders could be merely to restock depleted inventories. It would be unusual for them to persist at this level for long.

Business Inventories across the board are down and are in contraction on a three-month moving average basis.

Shipments, which measure Durable Goods out the door, is up, but only to its long-term average.

Unfilled Orders are unchanged, indicating that there’s no backlog awaiting fulfillment.

Manufacturer Inventories are below their average, too, following a recent spike.

Housing and Construction

Housing Starts fell by about 10% from December to January, likely due to inclement weather. Residential investment is stalled, and with a labor-driven supply shock in the offing, likely to continue to head downward from here.

Building Permits lead Housing Starts by six months or so, so the pullback in Permits to build presage continued weakness in Housing Construction. There’s a world in which deregulatory impulses make zoning requirements less onerous and contribute to a surge in housing; however, these regulations are local in nature and enforcement, so unless the impulse is dispatched at the state and local level, the change in the Federal Government’s regulatory posture should be expected to change these dynamics.

Sales of new single-family homes constructed are falling on a 12-month moving average basis and are running below average. This is significant because the cost of shelter continues to be a major contributing factor to inflation. Mortgage rates have been falling, but not enough to reduce the affordability gap between what new homebuyers can afford and the price at which homebuilders can build and clear a normal profit.

Total Construction spending is down across the economy,

and is now in contraction among Manufacturers. Plant expansion is likely done for the foreseeable future.

Retail and Consumption

Real Personal Consumption has been generally robust during the past several years, as the insatiable American appetite for spending steadily drove the economy. The three-month moving average is still a noisy dataset but is a necessary frequency to grasp the trend over the past quarter. Real PCE is trending downward—as it often does—but is down even on a six-month basis. This is consistent with the struggles reported to be affecting the lower quantiles of income earners.

Income

Despite the fallback in spending, Real Disposable Income expanded on a three-month moving average basis. Its growth is just about average for the period since 1959.

Falling spending and increasing incomes point toward increasing savings, typically a harbinger of caution.

Prices

Inflation as measured by the Personal Consumption Expenditures price index continue to show mounting inflation pressures. On the three-month moving average, we still see the increase in the general price level averaging 2.9%, far higher than the Fed should feel comfortable with.

Though there are numerous measures of core inflation, they all seek to do the same thing: remove outliers that impart more noise than signal to the data. This is typically done by removing food and energy prices from the index, as these are purportedly more volatile; thus, we have Core PCE:

Core PCE has been moving closer to the Fed target, currently at 2.4% on a three-month moving average basis. Stripping out the impact of non-market determined prices (such as imputed prices) inflation registers in the 2.4% annual range. Still, that’s nearly a half a point off of their target, and the threat of higher prices due to tariffs looms.

Looking at pipeline inflation as measured by the Producer Price Index, we see lessening price pressures in February as compared to January. While welcome news on a monthly basis, the three-month moving average paints a different picture: Producer Prices on a three-month moving average basis remain stuck at north of 4%.

That would be fine for businesses if they could pass along those price increases to consumers. However, looking at business markups, it looks like profitability will be impacted. Markups are trending down toward 2%—great for inflation, certainly, but indicative of lesser pricing power for Wholesalers.

Plotting Producer Prices against our measures of the economy’s productive capacity, we can see that price pressures and capacity utilization remain elevated. As tariffs impact input prices and the labor force contracts, we can expect to see countervailing forces in these measures, pushing all three up and down simultaneously. What forces eventually come to dominate is difficult to predict, but if the economy starts to look more like the Brexit economy (as we have written it likely will) we expect to see slower growth, lower capacity utilization, and higher producer prices. This combination typically precedes lower corporate margins.

International Trade

Exports have fallen once again. Partly this is down to the strength of the US dollar, which, while not at a record high, is certainly more than strong enough to make US exports uncompetitive.

Imports were also down in the fourth quarter of 2024, too.

The slightly improved Net Exports position in the final quarter of 2024 does little to change the narrative. The US continues to be an importer of goods and services on a net basis, and there is nothing wrong with this. Accounting for International Trade can be confusing because deficits are so often considered to be a bad. However, these are just accounting conventions, and they merely reflect that it is more cost effective for the US to outsource the creation of some things of value to the workshops of the world than to make itself. The world pays the US to be, in some sense, a manager of the world economy, and its chief value-added to world growth consists in its production-organizing activities, rather than its execution of those same activities.

The decision about where to produce goods is complex at the product level, and even more so at the level of the Global Economy. Heavy duty pickups alone cross the US border multiple times during the manufacturing process. Whether a given task is undertaken in the US, Canada or Mexico has as much to do with the cost of labor in those countries, the mix of skills in those countries’ workforce, as well as the capital employed in the production process. In advanced manufacturing, we see more and more of these tasks undertaken by robots of varying degrees of autonomy and capability, so the choice of where to locate plant has a substantial amount to do with the degree and level of sophistication of the interaction between laborer and robot.

It is not crazy, therefore, that an increase in the cost of labor, a decrease in the cost of robots and an increase in their capability, and a change in industrial and trade policy, could yet lead to a manufacturing renaissance in advanced economies. And this is likely the story behind the improvement in the Net Export position of the United States from pre-COVID times to the present. Still, it is not guaranteed, and it most definitely demands certainty on the part of those making capital investments in robots to progress, since in absence of certainty about the policy regime, investments are more likely to be deferred or not to be made at all.

Labor

Quite a bit has been written in the industrial ‘news’ complex about the radical changes in the US government workforce effected by the deputization of the ‘Department’ of Government ‘Efficiency’. The Federal Government is a massive employer in certain parts of the United States—Washington, DC and Virginia, in particular—but its size compared to the total workforce remains pretty small.

At about 2 million workers, it is somewhere between the size of an Amazon and a Walmart in terms of labor footprint. As a result of earlier Governmental Efficiency drives, perhaps another two private contractors are employed for every one directly employed by the Federal Government, so perhaps 6 million Americans work directly or indirectly for the Federal Government. Were half of those employees suddenly to lose their jobs, the unemployment rate would rise to about 6%.

Of course, not all of those employees would remain in the workforce, and certainly many would find new jobs in state and local government or the private sector. Government layoffs would not in and of themselves spell disaster for the US economy. And while the reduction in spending would have a broader impact on the economy via the multiplier effect, it is not clear that this action alone would thrust the US into contraction. However, large scale layoffs have a psychological effect on everyone, making every worker more wary of being let go, and therefore less likely to spend as much. In this way, the knock-on effects of the Government’s current efficiency drive are fiscally contractionary, and we should expect to see both Government spending as well as Private spending contract.

We haven’t yet seen the impact of layoffs in the employment data, though hiring has slowed. Nonfarm payrolls for February show a still robust labor market. Not much has changed here since the Labor Market stabilized in the middle of 2024.

The unemployment rate ticked up a bit, but was essentially unchanged at 4.1%—still below the Natural Rate of Unemployment.

The ADP nonfarm private payroll report was weaker than expected but still reflects a Labor Market in expansion and running at about an average number of new jobs in the private sector.

Our indicators of Labor Demand, the Job Openings and Labor Turnover Survey (JOLTS), show above-average openings in February, but no change from its prior reading. Employers are likely in wait-and-see mode with regard to their expected demand for Labor.

When comparing workers available to open jobs, we see that the balance still slightly favors Labor, though not to the extremes we saw during the COVID-19 era and its aftermath. No real pickup is discernible in either Capital or Labor’s ability to negotiate wages, so we would anticipate that employment costs will remain more or less steady—at least until and only if we see dramatic changes in the size and composition of the workforce.

Layoffs remain low relative to recent history. Clearly, these are not recessionary levels of layoffs, and the change in Government Payrolls likely won’t have an appreciable impact on them, either. But Layoffs is also a coincident indicator, so don’t expect to see this measure move up until a contraction is already well underway and self-reinforcing.

The Quits Rate has unexpectedly turn up toward its average. Ordinarily, during periods of heightened employment concern, we’d see this rate fall. That it is rising can mean that workers feel comfortable enough in their prospects of finding another job that they are willing to leave a job, or that they are quitting for another, higher paying job. This may be noise or signal and must bear additional scrutiny as well as a reservation of judgment.

Surveys

As mentioned at the top, survey data are coming in weaker. After a period of optimism following the election, Purchasing Managers in the Manufacturing sector are losing enthusiasm for the future. This likely results from the fact that so much of the inputs to American manufacturing are imports.

This is reflected in the surge in the Price Index.

The outlook for Employment in Manufacturing is similarly dim.

Keep in mind that Manufacturing, while a focus of the past two administrations, still comprises a mere 7% of economic activity in the United States. If one wanted to affect the US economy’s growth rate appreciably, one likely wouldn’t try to juice manufactures. However, place-based industrial policy, which aims to improve economic conditions in areas that have been left behind by the modern services economy, when coupled with arguments in favor of national security and supply chain robustness, are defensible. That these policies are no longer in favor is clear, and so we should not be surprised by Manufacturing’s renewed decline.

To round out the survey data, the Non-Manufacturing Purchasing Managers Index shows expansion, though below its average for the past few years. The majority of industry in the United States is in expansion mode generally, despite the stop-start activity in Manufacturing.

In Sum

We’ve seen a general divergence between survey data and hard data since COVID. We mostly wait for the prior relationships to reassert themselves, but it is not necessary that they do so. We may have a permanently impaired ability to obtain accurate assessments due to the difficulty of conducting polling in the current climate, as well the ferocity with which respondents believe what they believe. From 2022 to the present, economic data have on the whole been fairly strong for an advanced economy, much in contrast with reported opinion. But expectations have taken a turn, and the question is whether the economy will follow. There are early indications that they have, but the data are not yet unanimous on the matter. That the markets, the ultimate expectations machines, have sold off in the US and risen elsewhere may give us early indication of data yet to come. The economy seems to be downshifting to a lower gear, perhaps below 2% growth, but much more must go wrong before we are convinced that growth has truly stalled or contraction has begun in earnest in the United States.