Apollo Global Chief Economist: In the coming weeks, the U.S. economy will face a series of shocks

Apollo's Chief Economist Warns: The U.S. Economy is Facing a Critical Moment of Soft Data Turning into Hard Data, and the Federal Reserve's Decision May Be Key.

Recently, Apollo's Chief Economist Torsten Slok stated in an interview with Bloomberg Television that recent soft data in the U.S. is showing signs of weakening economic activity, which may soon affect hard data performance.

Slok stated:

"In the past few weeks, we have seen changes in some specific indicators, such as the number of moviegoers and Broadway show audiences declining. TSA _ (Transportation Security Administration) _ flight passenger data, and even the number of visitors to the Statue of Liberty in New York, all of these data have actually started to weaken."

"These changes in high-frequency data, combined with the decline in the University of Michigan Consumer Confidence Index, indicate that the economy may be facing greater challenges."

It is noteworthy that not only consumer data is weak, but corporate data is also beginning to show warning signs.

Reports from the Dallas Fed, Philadelphia Fed, and New York Fed indicate that businesses in these regions are starting to cut capital expenditure plans, and NFIB and other roundtable surveys also show that capital expenditure plans are being reduced.

Slok stated that in the current economic environment, both consumers and businesses are in a wait-and-see mode, and the weakness of soft data is likely to lead to a decline in hard data:

"Declining consumer confidence and declining business confidence are all signs that hard data is about to slow down."

Double Shock: Government Layoffs and Tariff Barriers

When asked whether the U.S. economy's ability to withstand shocks has diminished, Slok pointed out that the current U.S. economy is facing two major shocks: government layoffs and increased tariffs.

Slok further explained:

"It is estimated that about 300,000 government workers may lose their jobs. According to research from the Brookings Institution, there are about two contractors for every federal worker. Overall, the actual employment number in the federal government is about 19 million."

"Considering that there are a total of 130 million households in the U.S., and federal workers or contractors typically live with private sector personnel, about 10-15% of households may be emotionally affected by government layoffs."

Regarding tariffs, Slok stated:

"Tariffs will particularly affect those involved in trade with Canada and Mexico, which play an important role in the northern and southern border states."

Government Spending Cuts Will Support Economic Development

Some believe that the U.S. economy is actually supported by government spending, and recent economic fluctuations may just be a process of retreating from the "sweet peak" of large-scale fiscal spending by the government in the post-pandemic period.

In this regard, Slok expressed partial agreement with the view of 'detox.'

"If we analyze the non-farm employment data from the past two years, 25% of the jobs created in 2023 and 2024 are government jobs. In the previous year, this proportion was only 5-10%, much lower." "So a large part of the employment growth over the past two years has indeed come from the government sector, while the private sector's employment growth has already begun to slow down in the face of the economic shock expected in 2025."

This means that the government sector has played a disproportionate role in recent employment growth, while the performance of the private sector has started to weaken. If government spending decreases, it may further exacerbate the pressure of economic growth slowdown.

Supporting the Federal Reserve to Keep Inflation "At a Slightly Elevated Level"

A core focus of the dialogue is the dilemma faced by the Federal Reserve regarding inflation and growth. Slok believes that the current real challenge is: the inflation level has unfortunately remained at a relatively high level of about 3% even before the implementation of tariff policies.

"Most calculations show that tariffs will increase the inflation rate by about 0.5 percentage points. So the starting point is very important."

"If starting from a 3% inflation rate and then adding 0.5%, the risk is that inflation will significantly exceed the Federal Reserve's target. In contrast, if starting from a level of 1.5% like in 2016, after adding 0.5%, inflation would be close to the Federal Reserve's target."

When asked whether he agrees with Mohamed El-Erian's view—that the Federal Reserve should allow inflation to remain slightly elevated for a longer period and address growth issues through at least one rate cut this year—Slok clearly expressed agreement.

"Absolutely agree, because the Federal Reserve has a dual mandate... If the unemployment rate starts to rise in the coming weeks, the Federal Reserve is likely to focus on growth issues, as long as inflation expectations remain anchored."

Regarding the upcoming FOMC meeting on March 19, Slok stated that he will pay special attention to Powell's level of concern about the weakening of soft data.

Slok mentioned that Powell's attitude at the New York USMPF meeting has shown a subtle shift: from the preliminary remarks of "everything is generally good" to mentioning "more attention may need to be paid to downside risks" during the Q&A session, the Federal Reserve's communication style has gradually shifted from "no assumptions, no guesses, no speculations" last November to recently beginning to directly address policy issues.

"I think he will start discussing the weakness of soft data and may even express concerns about the weakness of hard data."

In the face of potential tax cuts, regulatory easing, and other policy prospects, the Federal Reserve's policy-making has become more complex. Slok emphasized:

"The debate between policy dependence and data dependence has become very important, as the policies currently in place—the government layoffs leading to rising unemployment and tariffs leading to rising inflation—are the shocks that the Federal Reserve needs to address first."