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04/04/2025
So far, Trump’s tariff threats are mainly harming sentiment. That could change quite quickly, in ways that would be hard to undo or mitigate.
Even in normal times, forecasting business cycles is more art than a science. Part of the reason is that corporate investments are very volatile, but not in ways one can easily discern in advance. When economists try to forecast it, they tend to rely on survey data, such as the manufacturing (Institute for Supply Management) ISM New Orders Index, which has declined below a seasonally adjusted reading of 50,Bloomberg Finance L.P., as of 4/1/2025 which historically has signaled an upcoming contraction. The main reason seems to be the erratic trade policy of the Trump administration. So far, the various policy announcements appear to be harming sentiment among U.S. businesses, but have yet to trigger a measurable investment boom in the U.S. by foreign manufacturers trying to avoid these tariffs.
However, do not pencil in a U.S. recession just yet. As our Chart of Week shows, the ISM New Orders Index is a rather imperfect guide to what the businesses actually tend to report as new orders over the next 6 months. In normal times, sentiment varies a lot more than actual investments from month to month, often without depicting reliable trends. This is in part due to the relatively small sample size in such surveys. More subtly, it's quite a different story whether an executive is asked to state a noncommittal opinion in a survey or actually has to decide whether to pull the plug on a long-planned project, perhaps having to write down some of the costs already incurred.
In normal times, the ISM New Orders Index is quite an imperfect guide for actual U.S. business investments
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 3/31/25
Investment cycles typically turn when many businesses decide to stop investing at roughly the same time, for example, when they see demand weakening, their stock price falling or loan conditions deteriorating. At cyclical turning points, this can easily lead to a vicious circle of gloom re-enforcing gloom. As Nobel Prize-winning economists George Akerlof and Robert Shiller describe in their marvelous book, “Animal Spirits,” “When companies actually decide to invest, the psychological factors underlying investment play a major rule (…) decisions that matter for investment are intuitive rather than analytical. That intuition is a social process that follows the laws of (…) social psychology.”[1] In other words, if the Trump administration wants to prevent negative sentiment from spilling over into real economic decision-making, it should act very soon.
Shiller, R. and Akerlof, G. (2009) “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism,” Princeton University Press, pp. 143-144.
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