Market Pulse Q&A: Economists On Inflation, Consumer Spending and More

Both before and during each Market Pulse webinar, our audience submits their burning questions to our expert panelists. For our March Market Pulse webinar, an all-star economist panel, composed of Dr. Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates, Dr. Robert Wescott, President of Wescott Strategic Advisors, and Dr. Mark Zandi, Chief Economist at Moody’s Analytics, addressed many of these audience questions in a lively panel. Below are their answers on questions around economic indicators, tariffs, and more. 

Q: Are markets prematurely pricing in rate cuts and is the Fed making yet another "transitory" mistake?

Dr. Robert Wescott, President at Wescott Strategic Advisors: Unless the labor market cools significantly and shows clear signs of weakening, the Fed is likely to continue to “tread water” for the next few meetings until it can better assess the scope and impact of recent events on inflation. If the impact on inflation is relatively large, then it seems unlikely that the Fed would opt for three 25 bps rate cuts over the course of the year as markets are currently predicting. However, if there are labor market disruptions and significantly lower economic growth as well as higher inflation, the Fed would be in a more difficult position to satisfy its dual mandate of stabilizing both the labor market and inflation. In this case, it will depend on which “risk” the Fed judges is worse—higher inflation or a collapsing U.S. economy.

Q: Can you elaborate on why economists fear an economic slowdown when the unemployment rate is 4.1% and the price of gas is falling?

Dr. Wescott, Wescott Strategic Advisors: The U.S. economy began 2025 in a generally strong position: historically low unemployment, inflation that is generally trending down, and strong consumer spending. However, we are increasingly concerned that tariff uncertainty and impacts could cause stock market wealth to erode, which could slow consumer spending – a force that’s been propelling growth the past few years. And although not all U.S. households have ties to the stock market (the Federal Reserve Board estimates that about 58% of U.S. households owned stocks either directly or indirectly – usually through retirement funds – in 2022), consumer spending has been concentrated among these wealthier households, so a slowdown in spending for these higher-income households would almost certainly be felt across the whole economy. If spending slows enough, it could have meaningful labor market impacts, which is why we think recession risks are worth monitoring this year.

Q: While I agree on the wealth effect on the upside, research has shown that it is not symmetrical (i.e. when markets go down, spending doesn’t go down to the same degree).

Dr. Wescott, Wescott Strategic Advisors: You are right that the literature on the wealth effects is somewhat mixed. Reliable research, including by Nobel Laureate Franco Modigliani, does tend to report fairly symmetrical impacts of both increases and decreases in wealth on consumer spending. Professor Robert Shiller, another Nobel Prize winning economist who has studied the effects of housing wealth on consumer spending, also tends to find generally symmetrical effects, but in truth, there really has only been one substantial downswing in U.S. housing values in the past 75 years, and that was starting in 2006 in the prelude to the Great Financial Recession of 2008-09. So one episode is not really enough to draw any definitive conclusions on the downside effects of housing wealth. We do know that something Alan Greenspan called “Mortgage Equity Withdrawal” (i.e. home equity loans) did dry up as housing prices collapsed and almost certainly did have an amplifying negative impact on consumer spending in that period.

Q: Do you have any final thoughts or key takeaways for our audience? 

Dr. Mark Zandi, Chief Economist at Moody’s Analytics: I think the worst is over for delinquencies on credit cards, auto loans, consumer finance, and retail card. The peak in delinquency was likely last summer. It has trended a bit lower and will continue to decrease. There's been a tightening in underwriting standards in the wake of the banking crisis two years ago. [...] They are slowly moving in the right direction as long as the unemployment rate stays low. I do worry about two factors. One is federal student loans, obviously given everything we were discussing. The other is FHA mortgage delinquency, which has risen considerably. There are a lot of reasons why that might be going on around debt to income risk layering. But one pet theory I have is that many people got mortgages thinking that the rates would come down and they could refinance. Rates have not come down. Fixed mortgage rates are still 6.75%, so they're getting no relief on their interest payments, and, if you have a high debt-to-income ratio and do not get that relief, you blow through your cash cushion and wind up in delinquency. Fortunately, there's a lot of equity out there, and that should forestall foreclosure. 

Dr. Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates: I think another missing element that we're not paying enough attention to is the cost of insurance. So the cost of auto insurance and homeowners’ insurance, if you're even insurable in the homeowner market, is really problematic. It is going to throw a monkey wrench in the mortgage market, certainly affecting affordability. And, according to Cox, cars are what $49,000 on average for new cars. [...] On top of that, auto insurance is up something like 11% or 12% year-over-year. So, I think those are some very big risks as well to the consumer and what they might do. 

Dr. Wescott, Wescott Strategic Advisors: The labor market really has been a key pillar of the American economy for the last three years, and that's been strong. So, I am a little concerned about the recent major layoffs. We're watching the effects of these federal layoffs. And we do know that a lot of companies probably have more workers than they really need. There was a massive effort to hire in 2022 and 2023 by many companies in finance, banking, management, and consulting among others. They were scrambling. It was so hard to find workers that they grabbed everyone they could get, and the utilization rate of those employees hasn't been as high in many companies. But they didn't want to have mass layoffs, because they thought that would cause negative reputational effects on their companies. So one of the things we're keeping an eye on is just whether there could be spillover effects from the layoffs in the federal government in the private sector firms who may feel that they have more people than they need.