Mark Schniepp
April 2025
Rates and Tariffs
Interest rates have been benefitting from the market chaos that’s been hurting stock prices, especially the freefall declines in value on April 3, 4, and 7 which represented a 15 percent decline. In tandem with stock prices, yields on the 10-year Treasury bond have also been in a freefall during the first week of April. This has lowered the mortgage rate to its lowest level in months. However, it is now at 6.52 percent. Whether this was an intentional outcome or merely a fortunate byproduct, it represents a measure of relief.
As somewhat of a surprise, U.S. companies will now have to grapple with the implications of much larger-than-expected reciprocal tariffs announced on Liberation Day, April 2, and detailed on April 4. They will also have to consider impacts of any retaliation that follows.
The tariff formula put in place this month represents a major shift in our foreign trade strategy, designed to adjust global commerce incentives. Trump claims to be restoring fairness to a system long skewed against U.S. producers. The formula introduces a principal of proportional fairness on our trading partners which invites negotiation in the hopes of reducing the level of tariff or entirely eliminating it.
The tariffs imposed on all countries that the U.S. trades with—all 185—claim to embody a “half reciprocal” approach. Whatever tariff a country charges the U.S., only half as much will be charged on goods coming into the U.S. from that country. Consequently, the new tariff policy is actually restrained. The problem however is that actual trade barrier tariffs are not charged on our incoming goods, at least not to the extent to which the administration claims. The half reciprocal U.S. tariff is estimated as what is approximately necessary to balance trade value with each country, that is: Import value = export value, country by country.
The trade balance formula for “half reciprocal tariffs”
Tariff retaliation is not likely because our trading partners will find it more economically advantageous to lower their own tariffs rather than retaliate with higher ones. However, China did retaliate and now we are in a trade war. This is not being well received by the stock market.
DOGE
Most of the impact from DOGE-fueled spending and employment cuts have yet to be seen. The work of DOGE has reduced federal government payroll employment to date with many more layoffs likely in the coming months despite all the legal injunctions that have delayed thousands of job terminations.
Monitoring layoffs and unemployment
To date in 2025, there has been no evidence that private sector layoffs or unemployment are rising. We use the monthly Challenger Report on layoffs and the weekly unemployment insurance claim reports to monitor the possibility of higher rates of unemployment.
In the latest report, of the just over 275,000 job cuts in March announced by U.S.-based employers, 80 percent of those were federal government workers whose employment status was terminated by DOGE. This signals that the public sector will likely become a headwind to job growth over the next several months. The recent Supreme Court ruling that the order to reinstate thousands of fired federal workers be lifted, will substantially raise layoffs in April.
In March however, the employment report showed that job growth came in at 228,000 which was way above expectations. During the first 3 months of 2025, employment gains are averaging just 152,000 per month. By comparison, the labor market averaged 168,000 jobs per month in 2024 and 216,000 in 2023. So, while there is a slowdown in job creation, there is also a more meaningful slowdown in immigration through the southern border which has limited the extent to which the labor market can create new jobs when there are fewer job seekers. The unemployment rate for March ticked up slightly to 4.2 percent and has been moving in a narrow range of 4.0 to 4.2 percent every month for the last 10 months.
Stock Market
The latest bear run has been alarming for the equity market. All of the major market indices have been in a freefall. The Dow Jones Industrial Index declined 7.9 percent during the week ending April 4 and is off 9.9 percent for the year so far. The S&P 500 was down 9.1 percent during the week and is down 14.1 percent in 2025. The Nasdaq was down 10 percent for the week and down 19 percent year-to-date in 2025. The mood of the Stock Market over the last month has been to shoot first and ask questions later.
This is occurring at a time when there are no clear signs that economic conditions are beginning to deteriorate — either domestically or globally. The recent evidence shows that manufacturing output is expanding, new orders for manufactured products are higher, residential construction spending is increasing in 2025, new car sales had a breakout month of March, labor markets are still creating jobs at a significant rate, and the unemployment rate is stable. So, while there is simply not much trauma in the U.S. economy, the uncertainty of how the new tariff and government downsizing regime will impact the economy is sending investors to cover.
On the bright side, U.S. equity markets are finally beginning to approach levels where valuations are becoming attractive enough to start planning for future purchases. While this may not yet be the time for buying in earnest, this is the moment to prepare. The more compelling entry point is when PE ratios drop below 20, if they at all get there.
The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.