Which Economic Indicators Are Most Important to Pay Attention to During Periods of Volatility?

On this episode of The Long View, Dr. Paul Ashworth, who serves as Chief North America Economist at Capital Economics, discusses the challenges in economic forecasting, what indicators he’s paying attention to, why removing the Fed Chair still may not mean lower interest rates, and how the affect of President Donald Trump’s policy is different this time.

Here are a few highlights from Ashworth’s conversation with Morningstar’s Dan Lefkovitz.

Why Trump’s First Trade War Was More Like a ‘Trade Skirmish’ Compared With 2025

Dan Lefkovitz: We obviously saw a trade war between the US and China in the first Trump administration in 2018. My memory that was the heart of it. How useful do you think that history is to us today in thinking about the road ahead?

Paul Ashworth: Not really very useful at all. I’m not sure we can, with hindsight, now call that a trade war, maybe a light skirmish, something rather like a trade skirmish. We had tariffs of up to 25% on less than half of Chinese exports to the US, which means the effective tariff rate on China rose to something like 12%, 13%, something like that. Within the first couple of months the Trump administration has already worked 20% in two 10% tranches on top, on to exports coming from China, so that basically tripled what we’d already had in the first administration in the first couple of months. Then obviously, things have just gone exponential from there to the point where the effective tariff now stands north of 100%, so completely different, I think.

But also the currency response was very different then. So the renminbi weakened very quickly and very markedly against the dollar. Now how to offset some of the price hit, inflation hit from a higher price of imported Chinese goods. So obviously we’ve had the dollar going in the other direction this time. So yeah, I’m not sure it helps really. I guess we did learn a couple of things. We learned exporters are not really willing to eat this in terms of lowering their own prices. And so that’s an assumption we’re still sticking to. But yeah, certainly in terms of the currency response, it’s been the polar opposite. I guess as well, you could talk about how the Trump administration, the first administration was quite careful to avoid hitting final consumer prices as much as possible. The tariffs that were levied, were levied on intermediate goods as far as possible to try and absorb some of the hit to final prices. And that could be what we’re seeing now as the playbook again with the exemptions to things like electronics, those sorts of things.

So trying to avoid the price of an iPhone going through the roof. So yeah, the scour of it is completely different. The currency response is completely different. But I guess there are some elements that are common between the two.

Does Negative Consumer Sentiment Become a Self-Fulfilling Prophecy?

Lefkovitz: Consumer sentiment is one area where we’ve already seen a negative effect. How much importance do you place on those consumer-sentiment numbers? To what extent can they become a self-fulfilling prophecy?

Ashworth: I place a lot less emphasis on the so-called soft data survey than we’re used to. The first thing is to say is that you’re referencing the University of Michigan’s Consumer Sentiment Index, which has fallen very, very sharply over the last couple of months. And within that survey, it also records household inflation expectations and those have surged as well. Yeah, we also have other evidence from consumer confidence from organizations like The Conference Board, which suggest that although confidence has dropped back a bit, the decline is nowhere near as severe. And other surveys of household inflation expectations, which don’t show big surge. And of course, we haven’t seen the big surge in inflation expectations in market-based measures of inflation expectations. So breakeven inflation rates. So, I’d be a bit careful about interpreting the big decline in one single measure of consumer confidence and one measure of inflation expectations as particularly troubling. Particularly again, with that University of Michigan series, because it appears to be for whatever reason, I don’t quite fully understand why it is very sensitive to inflation. So the previous low in the University of Michigan series actually occurs in 2022 when inflation was in sight rather than in 2020 when covid was going full tilt, and the economy was on its knees. So again, I find that quite interesting.

Which Economic Indicators Are Most Important to Pay Attention to During Periods of Volatility?

Lefkovitz: I’m curious which economic indicators you think are the most important to pay attention to?

Ashworth: Well, again, as I said, I think I put less weight—the survey evidence for whatever reason, the soft data used to be really good because it’s providing you with the best forward-looking guide to what’s actually happening in real time in the economy. Those measures for whatever reason, I think some of it might just be down to the fact that survey response-level rates have dropped quite a lot. So we can see this from some of the official surveys. Particularly the employment survey, long, fine payroll numbers, response rates have dropped, half the initial response rates have dropped quite a long way. But I suspect that spills over into some of the soft data, too, although it’s not fully reported. Consumer confidence appears to be less useful. With regard to consumer-spending, consumption, and survey-based activity measures like measures from the ISM and the S&P Global, they appear to have peaked—as a guide to industrial production, manufacturing, or indeed GDP. So that’s probably something that I would go to what’s happening to industrial production, manufacturing, and GDP.

So they’re probably something that I pay less attention to than I used to. And that just leaves us with the hard data. So retail sales. I’m very interested obviously in what households are doing and developing beyond that. The payroll numbers are still the number one indicator in the market because it gives you the first look at what’s happening each month. So we get the data for say, well, next week we’ll get the data for April only a week after a month has actually ended. So that’s about as timely an indicator as we get these days.