Good, everyone. Welcome to today's webcast, our Q2 2025 U.S. Commercial Bank Outlook, Assessing Bank Performance in an Uncertain Economic Environment. My name is Maureen McKenna, Head of Partnerships for the Commercial Banking segment here at S&P Global Market Intelligence, and I'll be your moderator for today's discussion. Before we get started, just a few housekeeping reminders. First, I wanted to draw your attention to the Q&A button at the bottom of your screen. Feel free to submit questions throughout the presentation or during the Q&A portion towards the end of the webinar. Given the number of people on today's webcast, we won't be able to answer all of your questions, but we'll get to as many as we can and answer the most frequently submitted questions.
I also wanted to highlight the related content widget, which includes links to recent research from our research team, information on our upcoming Community Bankers Conference, a link to Nathan Stovall's Street Talk podcast, and our bank toolkit, which highlights the workflows that S&P Capital IQ Pro supports for banks, for those of you who may not currently subscribe to our S&P Capital IQ Pro platform. There are some other resources, so take a look when you have a chance. The elements on your screen can be adjusted in size to maximize your viewing experience, so feel free to minimize or maximize the audio view or the slides to your comfort. This webinar provides closed captioning in English. Please click on the CC icon in the media player to activate it. Last but not least, a survey will appear at the end of this session.
It takes less than a minute to complete and really helps us plan for future webinars, so thanks in advance for completing the survey. Please note that the activities of S&P Global Market Intelligence are independent and separate from S&P Global Ratings. S&P Global Ratings maintains a separation of analytical and commercial activities. I just wanted to mention briefly our Community Bankers Conference coming up May 19th and 20th in just a few weeks. We developed this conference 13 years ago to provide a forum where we could discuss the most pressing strategic issues facing community banks in the current environment and with all of the recent developments in the industry around the economy, regulation, technology, and more, it's a great time to come together to speak with our speakers and your fellow attendees to discuss how to lead a high-performing bank despite the uncertainty in the market right now.
So we'd love to see you all there, and registration can be done through that link on your slide, so to kick things off today, before I introduce our speakers, we're going to send out our first polling question, and if you've been attending these webinars for the last several years since we've been doing them, you've probably seen this question before, but our responses have changed in light of the updates that have happened over the last few months, so the question is, what rate actions do you expect the Fed to take this year? No change, cut rates by 25 basis points, cut rates by 50 basis points, or potentially raise rates by 25 basis points? Don't know that anyone's forecasting that, but stranger things have happened, I'm sure, so while you all are taking a moment to answer that, I wanted to introduce our speakers.
First, Nathan Stovall, Director of our Financial Institutions Research Team here at S&P Global Market Intelligence. Nathan has nearly 20 years of experience covering the financial institution sector with a focus on U.S. banks and credit unions. He leads a team of researchers that publishes in-depth analysis on the drivers of strategy, profitability, and forecasts for U.S. depository financial institutions. We also have a former colleague with us. Beth Ann Bovino, is the Chief Economist at U.S. Bank. She has an extensive background in macroeconomic and financial analysis and a career that spans almost three decades. She joined U.S. Bank from S&P Global Ratings, where she was the Managing Director and Chief North American Economist. Prior to S&P Global Ratings, Beth Ann was an equity strategy research analyst at SunGard Institutional Brokerage Company and served in similar roles at UBS Warburg and the Federal Reserve Bank of Atlanta.
So, we're thrilled to have Beth Ann joining us today. So, let's take a quick look at the poll results. All right, so 23% of you said you don't think the Fed will change rates. 37% think the Fed will cut rates by 25 basis points. 34% think they'll cut rates by 50 basis points, which I believe is consensus right now. And 5% say raise rates by 25 basis points. So with that, I will turn it over to Nathan to get us started.
Thanks, Maureen, and thanks, everybody, for joining us today. Quite a smattering of answers there, and not surprising when you look at what the futures market is guiding right now. As Maureen said, that's pretty close to consensus, but you even got a pretty high probability of 100 basis points in cuts in the futures market right now, even as the Fed is saying they're very focused on inflation. Well, we're going to dig more into that later in Beth Ann's section, as well as when I get to interview her some. But I wanted to offer you where we think things are from the banking space and point to some key issues and metrics that we're looking at as we're trying to monitor performance going forward. Let's take a step back and think about where we were prior to April 2nd.
Heading into this year, I hadn't seen the industry and its advisors perhaps as positive about the space in quite some time. The fundamental environment, the table was really set for great results. Funding cost pressures were easing. We had a few rate cuts in the rearview mirror, and that was going to help support margin expansion. We had pro-growth policies and still a strong economy, and we thought that that was going to lead to stronger loan growth. So, really setting up for a very strong net interest income. We were expecting a friendlier regulatory environment, and that would allow for greater optionality in the space, both from an M&A perspective, but it also helped bring investors back to the table, supported higher valuations, and brought capital back, which, as I've talked about many times, has brought optionality back to institutions that hadn't been there for some time.
A t the same time, you were still seeing relatively benign credit trends. And then, April 2nd came and really changed sentiment towards the group with the announcement of universal tariffs against the 60 worst offenders, as the administration called it, and reciprocal tariffs against many countries, which ultimately we know were paused, with the exception of China, where the tariff rate was set at 145%. And you saw valuations really come under pressure after then. It should be said that a lot of the positives are still in place. We do think that balance sheets benefit from continued mixed shift with the idea that, again, higher cost funds, higher cost CDs are maturing and turning over at lower rates. We're also seeing lower yielding securities continue to mature, and banks are able to reinvest those at higher rates.
Credit is still holding up, as we've seen from first quarter results. I'll point to this several times again. What you've heard from banks on their earnings calls is that the guidance is generally holding for many of them. No doubt, the presence of tariffs changes the landscape. We'll have to see ultimately what comes to pass, but we think even in just where they are today, even on pause, there are some near-term impacts, and it will ultimately lead to slower loan growth than we would have expected otherwise for 2025 and certainly hurt deal-making. We've seen a few deals still come off, including in the bank space. The two largest this year have come after the election day announcements of tariffs.
We think ultimately that uncertainty will slow business expansion and ultimately lead to slightly higher credit costs, as we're already seeing the cost of loans and the cost of financing in the capital markets go up in some cases. Even with all of those issues being in place, it's still a relatively favorable environment, just one with a lot of uncertainty right now. I wanted to point to a few things in the market to just highlight the shocks we saw from tariffs. I'm sure many listeners have seen various measures over the last few weeks. Maybe you're getting tired of all the headlines here, but one that stands out to me is just the VIX, and that's what we're showing here. Measure of volatility that investors can actually trade.
This is showing we're on the right, where the VIX spiked on election day and how it was close, not quite to the level of what we saw at the height of the pandemic, which is quite worrying. Now, it should be noted that the VIX has come down since then, and we've seen some stabilization, and we've seen a little bit of a relief rally. I don't have this here, but I'd also point out that maybe we didn't see quite the same spike, but we have also seen spread widening in the credit markets with high yield indices, which could be seen as somewhat of a proxy for some bank loans widening considerably. They had tightened and so had broader corporate credit spreads this year, but we've actually given back some of that, almost all of that tightening since the April 2nd announcement.
This chart's a little bit busy, but I'll point you to that one line that is underlined in red here, and we looked at the weekly performance of bank stocks going back to 1990, and the week that broad tariffs were announced, ranks as one of the worst going back all the way to 1990, and the thing that I would really point out is it's not a good company there, and perhaps that's not surprising, but all those other dates, while that text might be pretty small, are 2008, 2009, height of the global financial crisis, or 2020, the height of the pandemic. I'm not saying that those numbers are appropriate. In fact, while we do think that earnings are more challenged than they would have been pre-tariff announcements, we're not in the camp that necessarily fundamental results match the valuations that we're necessarily seeing in the market today.
But that just shows how concerned investors were. And even as you see continued positive results from a lot of banks, the group feels very much like a show me story, and you're going to need to not only see one continued positive results from the group, but you're going to need to see what happens on the tariff front and policy front from the administration. Something else that we're watching closely is just what are the expectations for deal activity? And we can get to this later, certainly talk about bank M&A in particular. But one of the things that we thought was interesting is just to look at broad M&A and investment banking activity. And so, when I say investment banking activity, we're looking at not only M&A, but debt issuance and equity issuance.
You're seeing the expectations there are quite lower now than they were pre-tariff announcements. S&P acquired Visible Alpha not too long ago. One of the things that it allows us to do is look at estimates for very specific line items like investment banking fees and do so at a point in time. Here you're looking at projected investment banking fees for the big investment banking firms, JP Morgan, Goldman, BNP, Morgan, and Citi. We're showing what those projections are as of April 17th, 2025, and comparing them to March 31st, so a few days before the tariff announcements. The upshot is this: that those estimates are down 9% in just a few weeks. That's not based on the number of deals announced or anything like that. That's purely on the expectation. We've heard that there has been a freezing effect.
If you think about what happened in terms of valuations in the market, when you get a big reset like that, it'd be hard. It could definitely spoil some deals. But also the unknown is probably a much bigger one. What is the ultimate economic impact here? We're going to unpack that more later with Beth Ann, which I'm very much looking forward to because I know that's what's on everybody's mind. But if you think there's a greater prospect of a recession, that could push you to the sidelines or at least put you on hold. But I should note that, as I did at the outset, we have seen two of the largest bank deals announced this year. So,, it hasn't completely pushed people all the way to the sidelines.
That's noteworthy because banks are very cyclical, considered thermometers of their economies, part of the reason why they've been hit harder than the broader market on the tariff announcements. You still have some executives feeling confident to pursue a transaction. It doesn't mean that they're completely cold. We come into this quarter expecting much stronger loan growth, and that's what we're looking at here is loan growth for the banking industry as a whole. You're seeing the aggregate growth in the blue and then the median growth in the gold. The aggregate's going to be very much dominated by the big banks, which own over half of the loans in the industry, median more representative of community and regional banks. You'd seen pretty slow growth the last few quarters.
And then what I have here on the right in Q1 is the median as of a day or two ago, and the aggregate as of a day or two ago based on the early reports. Kind of more of the same. I pulled this data again this morning. The median number had crept up just a little bit. So, you hadn't actually seen growth really hit that much in first quarter earnings. But one of the challenges about trying to look at first quarter earnings for a read-through is that, again, the period ended March 31st before any of the protectionist policies were actually announced. So we've tried to look at H.8 data. And one of the things that the Fed's H.8 data does, which we've recently added to our product, actually shows these balances on a weekly basis.
It's for all commercial banks, beginning with all domestically chartered and foreign-weighted, large domestically chartered, small domestically chartered, and all banks at the bottom. We've broken up here on the actual loan numbers as of April 9th, the weekend of April 9th. On the far right, showing the year-over-year change, the takeaway there is pretty decent growth, not that much difference. We're showing that the year-to-date number since January 1st and then just the change since February 26th. Hadn't seen a huge, huge market change there, but we had seen a little bit of slower growth beginning in March. Ultimately, we think that you're really going to see a greater difference the further we go into April and get those results in May.
And hearing more talk about banks either tightening standards or increasing pricing on their loans, or at the very least trying to focus more on their best customers, just to tighten the credit box a little bit more. When you don't know where things are going to go, you want a little bit more protection. And we ultimately think that leads us to a place of slower loan growth for the year than we would have been otherwise, even if you get to a place where a lot of the tariffs that were proposed are negotiated down to more favorable levels. Of course, we're still spending plenty of time on funding. For those who've tuned into these webinars before, you know I've shared this slide a number of times. One of the things that we spend a lot of time looking at is CD pricing.
We have weekly rates data, which can show pretty much up to, not up to the minute, but on a week delay, pricing of CDs. The reason why we've looked at this so much is that CDs had absolutely cratered in terms of banks' reliance on them for funding during the pandemic, but we've gone back above pre-pandemic levels. It's even greater now when you just focus on community banks. Here we're showing the number of credit unions in blue and number of banks in gold offering one-year CDs over 3.5% at a given point in time. We have looked at it at 4%, and those numbers have come down quite considerably. The reason why we shifted to three is, again, when you've had 100 basis points of rate cuts, we've had some benefit from over-deposit calls for sure.
We wanted to sort of see how much is it actually going lower? Are we still able to really cut rates on those newly marketed CDs? With the idea here that we have big portions of our book that we originated in 2023 and 2024 when rates were at their highest, and that we won't get relief on those until they mature. We continue to believe that many banks will continue to want to retain that funding. And if so, they're going to have to meet the markets that are the rates that are available in the marketplace. If I showed you this chart against 4%, we've seen that number decline heavily. I failed to mention that the lines here are showing what percentage of deposits, credit union deposits, and aggregate that they're holding, and the bank deposits they're holding with an idea of these just tiny banks.
The biggest banks aren't involved here, and the credit union space, you can see the vast majority of them here, but the interesting factor to me is while we've seen the higher price, 4% and 5% CDs really tail off, and very, very few institutions down there. You didn't see the 3.5% number peak until early September, right before the Fed started cutting rates, and it's come down, but it hasn't come down that dramatically. You can see some stabilization here. Banks are still getting funding relief as those higher cost products are rolling over, and you have seen modest cuts in rates, and we've continued to see from the early reporters another 18 basis points in declines in cost deposits by those who have reported thus far, and that's the median decline, so we do think that that relief is in place.
This is our forecast for deposit costs overall, inclusive not only of interest-bearing deposits, but non-interest-bearing deposits as well. We think non-interest-bearing deposits actually hold this year. They've been declining steadily since the Fed first started raising rates. That's good news for banks because you've seen a really negative mix shift out of those funds into more expensive funding. We assumed in this forecast, actually, that 18 basis points decline, that was actually the number we had for the quarter-over-quarter change in Q1. That's included in this projection for 2025. We're not only showing the industry's aggregate cost of deposits, but we're comparing it to Fed funds.
And then the shaded area here is the spread between the two, with the idea that during this tightening cycle, we've not just only competed against one another, but we've had to compete against the institutional and money markets, short-term treasuries and the like, for funding. So as that gap narrows, we think deposit growth continues to hold. It has so far in Q1, and that's even with banks cutting costs, which is good news for the industry, and we think continues to hold the margin piece that we had coming in, no matter what happens really with tariffs. The loan growth piece, as I mentioned, is a little bit lower than what we would have expected. Here are our projections for loan growth in the blue, and then deposit growth, as I just alluded to, we think deposit growth is going to be pretty strong.
The median growth thus far through Q1 earnings is just over 1%. So we're on pace to basically meet what we're putting out there, just shy of 5%. On the loan growth piece, we're at about 3.25%. A couple of months ago, we were closer to 4.5%, maybe even 5%, thinking that the stronger growth policies would foster more activity, and you had seen small business and consumer sentiment really, really improve. Haven't shaved a lot off of it, and you've seen from the street too, you've seen slightly lower loan growth expectations, and you've seen a few banks cut forecasts, but nobody's slashing it yet. Credit is a question that we're all worried about. I'm not going to talk about commercial real estate today. That continues to be something we continue to watch. We think that losses will continue to increase there.
Delinquencies will continue to grind higher, but it'll be lumpy. Haven't been at the camp for some time. It's a calamity. I really wanted to focus on the consumer a bit because we have a consumer-driven economy and see how well the consumer is holding up. Here you're looking at card delinquencies amongst the largest card issuers. You can see we're still not back to the pre-pandemic average, even going into the first quarter data, up a lot from the trough in 2021, but still not back there. One of the reasons why performance has been so strong is the consumer was very much propped up by excess savings accumulated during the pandemic, which is what you're looking at here. We're showing the dollar amount saved on a monthly basis on these blue columns, and then comparing that to the pre-pandemic average on the red line.
Anything above the red line was considered excess. Anything below it was a deficit and drew away from it. We accumulated just over $2 trillion in excess savings, and they lasted all year long, and many people thought, eventually running out in the summer of 2024 when expanded unemployment benefits, or excuse me, they started to decline when expanded unemployment benefits went away in 2021, but savings eventually lasted all the way to the summer of 2024. So the consumer doesn't have that cushion, and for lower-income cohorts, it looks even more challenged than that. And those are the ones who could feel a greater brunt of tariffs. Ultimately, our projection for charge-offs here in the columns, charge-offs to average loans, we think that charge-offs go up this year.
And then we're showing the cost of funding those and the provisions for loan losses against net revenue, effectively. What's the cost of that? We think it's a headwind to earnings, but it's not that massive. It's more than what we've seen, but it is not a balance sheet issue for the bulk of banks. The longer tariffs last, if we're not able to go back to somewhere close we were or if some of the proposals were actually put in place, that might look worse. But as we sit here today, we're projecting earnings down 2%. We had previously been up 5%. That's a little bit more bearish than some out there, but it still doesn't match the valuations we're seeing in the street. So still pretty favorable environment, and if there's a quicker resolution, it could look better than that. But that's it for me.
Now I'm going to hand it back to Maureen, who I think is going to tee up our second polling question.
Yes. Second polling question to prepare us for Beth Ann's remarks. What's the probability of the U.S. entering a recession in 2025? So take a moment to answer that. We have four choices for you: a 40% chance, 25%, 10%, or 0%. And while you're taking a moment to answer that question, just a quick reminder that you can ask questions through the Q&A widget at the bottom of your screen. I'll give you just another few seconds, and let's take a look at the results. So almost 40% of the audience thinks there's a 40% probability of the U.S. entering a recession this year. Almost 44% think there's a 25% chance, and almost 14% think there's a 10% chance. So a little scary, but Beth Ann, we'll turn it over to you, and we'd love to hear your thoughts on that question, too.
Well, thank you very much. And it looks like misery loves company. So why don't we get into this discussion? Funnily, well, you know what? We'll get into it in both the polling when I get there, but why don't we go to the next slide? So here we are. Things certainly might have changed since the new year started. The trade war, I have to say, I mean, it certainly has reached a boiling point. There has been some calming recently. Let's see if it holds. I'm talking about between President Trump and China's political structures on the massive tariffs that they placed on each other. Let's see if it holds, but that does provide some hope, I guess you could say.
It might have changed, yes, last night, but at least that was what was happening earlier. So it has certainly sent tremors through the financial markets. I have no idea what the markets are doing today, but we certainly went through correction levels over 10%. I mean, it has not yet hit bear market territory. I believe not yet, but certainly getting close. The confidence levels have dropped significantly. In fact, households are much more bearish than what I just heard on the call from the polling with the. Well, no, it was pretty bearish. 25%, I guess, was the majority on risk of recession. And if you look at the confidence levels, they're all saying the recession practically already happened. The question there, though, is that we have not, have we seen that drop in confidence in the economy? Not quite yet.
And again, households don't necessarily, the confidence levels don't necessarily match up to what the economic outlook ultimately will be. The Fed remains non-committal. They're holding that they're content to wait this out. We'll see how long that lasts, but that is one thing that certainly markets don't agree with. I believe markets, they may have changed, but markets certainly had at one point in time for 20, they had four rate cuts for 2025. So there definitely is a disconnect between the two. View ahead, we do have a baseline forecast, which is much weaker, but it's still holding a, I wouldn't call it a soft landing, a bumpy landing, but not necessarily a recession. That real GDP number for first quarter is going to be hit really hard.
Based on the numbers that came in today, looking at the trade on goods, that would be the merchandise trade information, a lot of imports, that's a drag, further drag on growth. So, it likely could be a negative reading for first quarter, but will it last? And that's a big question. The unemployment rate likely to climb higher, but that is what would be expected from it because it's at a historic low. We don't see it climbing too dramatically, but again, we don't have a recession in our forecast. If that changes, so will the unemployment rates, unfortunately, in the wrong direction. Those tariffs, the tariffs are further eroding the economy's buffer, and that's where the risk could be for a recession. Right now, we see it as kind of the recession is narrowly avoided in our baseline, but it's really risky.
Indeed, when you can see the risk to the downside, the confidence interval is wide, but I'd have to say I believe those numbers that came out with. I believe 40% of those polled saw a 40% risk of recession. I think that those who saw a 25% risk of recession was a little bit higher. As you can see in this bottom, those bottom lines, you can see where we stand at U.S. Bank. We do have a high risk of recession at 40%, largely driven by the tariff war. If that is largely maintained to the levels that have been discussed by or announced by on Capitol Hill, it's hard to see the U.S. economy not suffering a recession. There are carve-outs, exemptions, and other subsidies that could reduce the impact, but it is certainly a concern.
One thing I would say is if you asked me in January what I saw was the biggest risk of recession, I thought it was the Fed making a policy mistake. Well, indeed, it is still a policy mistake here, but now it looks like it's coming from the federal government. I can go to the next slide now. So I believe Nathan put a few of these up here already, but I'll just give you more things to worry about. If you're looking at this slide, you can see that consumer confidence has tumbled, and it is in recessionary territory. I believe most recent numbers that came out this week show it even lower. One other thing to take into account is that consumer expectations when we look at the Conference Board is already in recession territory. And why is that? Because of fear of inflation.
Tariffs are a tax, and they are inflationary, and that's where folks are concerned about. I would also note that people were already concerned about inflation before the tariff war went into place. Even though, as an economist, I have seen the inflation readings on a year-over-year basis come down. Well, yay. That's good news, but do people really feel it when they go to the store? Levels in terms of prices are still rather high, and indeed, when we talk about those prices, they're still high relative to what people get in terms of wages, and that's the squeeze. Now, I mentioned on the top right-hand chart, I had mentioned what we expect for GDP.
Here, what was tracking before today was first quarter GDP was likely going to come in tracking at around a positive, but very, very minor, a very slow growth rate of just a 0.4%. We all know that the closer you get to zero, while it is positive, the closer you get to zero, the risk is that it could go below. After today's numbers with the trade, as I mentioned, with the trade in goods deficit being so wide, largely from imports, which is a drag on growth, very likely this number is going to go down and be in negative territory. Now, I want to note that that doesn't mean that one negative reading for growth doesn't signal recession. Even two negative readings of growth don't necessarily signal recession. The National Bureau of Economic Research looks for several factors that are at play.
But again, the worry, of course, is if we start to see those factors start to stumble out, then we have a concern. On the bottom left-hand chart, the jobs market has been holding up relatively well. You're looking at an unemployment rate at 4.2%, three-month average for job gains. Yeah, it's slowing, but it's still holding up. We see that as one big support for the economy, but the worry is when will businesses who may lose business from consumers start to have to cut production and also cut back on their job, on the workers, on their rosters? The biggest risk I mentioned is policy, and that risk really right now is the tariff war. If you look at the bottom right-hand chart, we've already seen Core Personal Consumption Expenditures deflator inflation coming higher. That's excluding energy and food. And we know those readings are big.
Energy and food prices are also always a concern. It's jumped up to about 2.8%, still incredibly high and well above the Fed's target of 2%, leaving the Fed in a bind. Now, let's go to the next slide. Talk about some of the, as Nathan had mentioned, incredible heightened policy uncertainty. And as Governor Chris Waller from the Fed has said, when you have heightened policy uncertainty, you have more scenarios. I did mention that our baseline forecast, which was completed before the April 2nd l iberation day , still had a soft landing, but with much weaker growth and higher inflation this year. At levels worse than even what the Fed, the disappointing Summary Economic Projections or the so-called dot plots had indicated. That still means that the Fed's path of two rate cuts are still possible this year.
I guess I would be in the camp of those folks who polled and said 50 basis points this year could be likely. But because of heightened inflation risks have increased chances, that means the Fed may need to be, may have to be even more cautious than we. And I believe about 34% of those folks that were polled and said 50 basis point cut, they need to be more cautious with only one rate cut this year. I already mentioned the 40% risk of recession over the next 12 months, which is much larger than the historic average of one in seven. And earlier, as I already mentioned, the Fed mistake was the biggest risk. Now it's a policy error from the White House. One scenario that we watch is what if they hold at just one cut this year?
Or, yeah, what if they just hold at one cut, at around 25 basis point cut this year? What would that mean? Why would that happen? Well, if inflation, they would need to do that. If inflation climbs higher and remains sticky, the Fed would need to stay on the sidelines. Remember, they're concerned about the job market. The job market, that is one of their mandates, but it's the long-term future for the job market. And if they see inflation climbing higher, they know that they'll have to move on that mandate first. So that could mean no rate cuts until sometime in 2026. High inflation and borrowing costs would result in a mild or possibly even a little higher, weaker recession. Another scenario that we look at, despite higher inflation, that a rapid increase in the unemployment rate may spook the Fed.
Think about what markets have been calling. They have been calling cutting rates four times this year. That was as recent as two or three weeks ago. I don't know where they stand right now, but they certainly were very fearful and afraid of recession and begging the Fed to cut rates. Let's see if the Fed cut rates by four times this year. Sure, maybe that would help a little bit with borrowing costs, but inflation would climb higher, forcing the Fed to cut rates next year for a much harder landing. Before I go into what could go wrong, go right, well, there's lots of questions right there, and maybe we'll save that for our discussion. But I do want to note one thing, that when you're thinking about what the Fed would be doing, remember that they have two mandates.
They have basically stable prices and an economy that's at maximum employment. We have an unemployment rate now at 4.2%. That's pretty much at target in my mind. So something that the Fed could say is pretty much they're comfortable with. But the unemployment rate at around 2.8% for the core, that's 80 basis points away from target. So in my mind, the Fed's focus would be on the inflation mandate, not yet the unemployment, the jobs mandate. We'll see what happens, but that's one of the reasons why I suspect the Fed will be much more cautious than maybe what markets expect right now. May I, I guess that might be my last slide, and I can pass it back to you, Nathan.
Great. Well, thank you, Beth Ann. And I wanted to pick up with some questions following up on some of the things you said. Really, really appreciate that outlook. This is one that I've gotten from a number of people, and we actually got various versions of this from the audience as well. The idea is, is there a way for us to go back from an economic standpoint to where we were prior to Liberation day? Could you get tariffs settled during the pause? Could you get things negotiated? Can we put the genie back in the bottle, so to speak, in your mind?
So let's see. I think that there's that would also help with inflation if we did see things calming down. Could they put the genie back in the bottle? Well, one thing I keep watching for is what will happen with the deliberations between China and the United States.
Keep in mind, China and the United States have had tariffs on each other now for, well, since President Trump was in office for the first time, and that held under President Biden. So I think some of the tariffs are going to stay in place. It's hard to see some of those going away. But can we see that so-called genie back in the bottle come about? I think that comes down to the what, 145 or 140, yeah, I guess it's about 145% tariffs between the United States and China. That's an effective embargo, and that's what needs to be addressed. I think the move and what could put the genie back in the bottle is the White House fears that a recession would be caused, a recession could come about from some of these moves.
That could be one case where we could see the White House start to pull back a little bit and talk about negotiations. But I do want to also note that the fight with China has been ongoing, and a lot of those reasons are very, very justified. When I think about the fight with China, I think about a level playing field, which the producers in the United States and really across most of the world don't have. We think about access to market, still a struggle for many producers and businesses in the United States when we do business in China. So that's still a struggle. And of course, one thing that the United States has asked for for many, many years is protection for our intellectual property. That would be financial services, insurance services, but it also would be just software, technology, and even movies.
That's an area where if we saw some move between negotiations with China and the U.S., it would be a win-win. We'd see tariffs coming down just a bit, inflation coming down just a bit, and a much stronger relationship for the two biggest economies in the world. I'm not holding my breath, but it is something that you can hope for. Sure. Well, let's all hope for that. As you said, everybody wins in that scenario. So I think everybody listening in would like to see that as well. Broadly speaking, though, let's take a step back and just think about tariffs being in place and the impacts they have. What's your view on how they would affect global supply chains and long-term productivity? What's sort of the longer-term impact there? Right. So looking at the April 2nd tariff announcement was a shock.
And then several, maybe a week or so after, with the retaliation from China, well, actually with the U.S. changing its tariffs on China and then the reciprocation from China back and forth, certainly put things much more into dire conditions. Many economists, including the economists at U.S. Bank, look at what this means for the effective tariff rate for the United States. Keep in mind, in early, basically before, in 2024, the effective tariff rate was 2.5%, very low. After April 2nd, it jumped to close to 23%. Now, and then it even jumped higher with the back and forth between China and the United States, including the U.S. Bank, could see it upwards of 28%. What does that mean?
The levels of tension and the cost that involves both on inflation and costs on people's just livelihoods and businesses is a very big strain on the economy. The U.S. could handle 10% tariff because we are largely domestically driven, but something going higher than that, reaching these levels that I just mentioned, is much more dire. Now, what does that mean for supply chains? You think about supply chains as kind of a, what's their aim? Supply chain managers face a lot of uncertainties, disruptions in their systems. We're talking about trade wars is one big one, labor strikes, all these things, and other wars, including, of course, a trade war. Their aim is to de-risk the global supply chain, strengthen their supply chains against disruptions, and there are costs involved in that.
So what you would end up seeing is that in a perfect world, of course, this would allow businesses to find what would be the "best solution" for commerce, the most cost-effective solution to get the supplies needed to run their businesses. But when managers are faced with disruption, they are faced now with choosing less efficient second, third, I would say where we are in the United States and maybe even the world right now, or even fourth best solutions. And that's with a loss of productivity. Think of the costs that were involved during COVID to get an idea of how difficult it was for supply chains to get the product and the supplies needed in order to make production work. Have we seen any cracks in the armor yet? Have we seen things changing? Not quite, but still a difficult situation.
I think right now, businesses, and we haven't seen inventories really climb dramatically. I think businesses are waiting to see, will this kind of go over and we'll get back to normal before we have to make those very costly adjustments.
You just spoke to this. We haven't seen cracks in the armor yet. You talked about this earlier. The differences, the divide we're seeing almost between sort of soft data and hard data, confidence waning, but the hard numbers kind of holding up. How do you see the consumer right now? I mean, we're worried about the sentiment. You talked about it being in really negative territory. But how do you see the consumer holding up, and I focus there for two reasons. One is consumer-driven economy, and two, that if tariffs were come into play, as they were being discussed, they would really impact the consumer negatively and as real engine of our economy. Do you think the consumer is stretched? Did you have worries about the consumer even before tariffs? And how does that kind of change if they come into play? How does it change your outlook?
Well, one of the things that I had expected consumers to slow down in spending. I mean, that's normal in a soft landing. You see, usually in a soft landing, what we're hoping is that with the Fed rate cut, rate hikes when we started out there and borrowing costs were a bit high, that was to address the inflation that the United States was facing after COVID. The Fed was able to start cutting rates, allowing for more accommodation, lower borrowing costs.
And that certainly helped, but borrowing costs may still feel a bit too high for many consumers. So what else do we have that would actually support the U.S. economy and U.S. households? One big one is the jobs market. That unemployment rate is now even at 4.2%, is so close to its historic low. We saw numbers that came out most recently, initial jobless claims, which is a very good leading indicator of what to expect for the jobs market. And that at around, I think it came in most recent, it's been hanging around about 220,000 or thereabouts. That is incredibly low, suggesting that people are still holding on to their jobs.
Now, when we look at the job openings data that came out today, we did see a drop in job openings, but we still have what we're looking at in particular is the so-called worker demand gap, which is close to normalizing. And that's also a good thing to read. The quit rate has come down partly because businesses are sort of holding on to their workers and workers a little bit more concerned about job security or staying where they are. That also is something that's more stable. And one reason why the Fed may be able to be a little accommodative today, depending, of course, what happens with the tariff, with the war, with the trade war. But I also wanted to make another thing to point out in terms of consumer spending and that support we have.
I mentioned the jobs numbers, but if we go back to where we were back in the financial crisis as we led into the financial crisis, think about the mortgage debt that households were holding. Back then, mortgage debt was largely financed by adjustable rate mortgages. So that mortgage rate could adjust very quickly, and that also meant the monthly mortgage payments could also adjust. And back then, of course, in 2006, when the Fed started raising rates, that monthly payment became much too big for people to absorb. But today, household mortgage rates, the household mortgages that, I'm sorry, the mortgages that households are holding, the majority, a large majority, I believe, is in fixed-rate long-term debt. Much different scenario than where we were.
It's one of the reasons why households are holding on to their home and not selling it, causing a little bit of a strain in supply for housing, but it is also a real cushion, meaning that household, that mortgage, that monthly mortgage, that monthly mortgage won't explode if the Fed had to keep rates at where they are or even go higher. That's also support I wanted to add, and one more thing you mentioned, the savings rate. Yes, it's come down, but it's still pretty high. I think it's around 4.6%. It's 4.6%. That's a lot better than what I remember it was back in 2005 when it was, I think, maybe 1% or even lower, so back to you, Nathan.
And to your point there on the mortgage piece, 70% or so of consumer debt is in their mortgages and with that fixed rate, that's why we haven't seen household debt to income spike up. We're sort of at that long-term historic level, whereas if you look pre-GFC, as you pointed to, 2-3 percentage points higher than that. So definitely something that is encouraging. Well, before we go for the last few questions, I want to sound out the audience that we're asking if you want to be contacted to learn more about our commercial banking data and research from S&P Global Market Intelligence, either saying yes, please do, or no, thank you at this time. But Beth Ann, I wanted just sort of two more pieces kind of in closing here. One, what are you looking for right now as early warning signs?
You said a number of times, and I heard this from bank earnings, that everybody's kind of a wait and see. We don't know. We're kind of hoping this almost goes away. What are you watching closely to be an early indicator that we're starting to see maybe cracks in the armor emerge?
Well, you know, I have to say one thing that I thought was interesting when I was listening to your part of this discussion when you talked about how banks, for example, while you can see some signs that they're maybe cutting forecasts, they're not slashing them yet. I found that to be reassuring because one thing I was watching is what during earnings call were big businesses and banks saying. And while we are seeing caution, we haven't yet seen huge cuts happening, and that's a positive.
But from an economic lens, one thing that I found, I look at a lot of indicators, but I like to look at leading indicators. We are starting to see some signs of stress, but not dramatically. One sign, I guess you could look at, it came out last week, I believe, was the capital goods, sorry, durable goods orders that came out. There we saw a nice jump in durable goods. That's positive for growth, but it was tied largely to the volatile airline or basically aircraft sector. When you take a look at one very key leading indicator that I like to watch, core capital goods orders, that's excluding aircraft and defense, that was weak, weaker than expected, and it came after a large drop the prior month.
My concern there is that businesses are, and by the way, that's also a leading indicator for equipment spending, so something I watch very closely. And my concern is businesses are holding back, waiting to see how the wind will blow before they move. I also looked at inventories. Inventories have really not held up very well. And my concern there is businesses are afraid that a recession will come into place, and they don't want to be stuck with inventory on their shelves. They'd rather have their shelves empty than be stuck with something that they'd have to sell at a much lower price. Last thing I watched, I know it came down earlier. I'd have to see what it did recently. Building permits are another thing to watch. I believe they were weak most recently. And I don't know if that's going to hold up.
I think that the new home sales still has some life in it, largely because people aren't selling existing homes as quickly because they don't want to give up those long-term locked-in rates. But watching building permits weaken, to me, is a concern that maybe builders are being cautious as well. I do want to give you a couple of quirky indicators that I watch. Cardboard Box Demand Indicator. Doesn't get much notice, but it is something that I keep an eye on because think about it, we're in a trade war, and if the demand for cardboard boxes drops, that means there's not a lot of stuff that's being shipped. And a funnier one that I just heard recently is the famous Tooth Fairy Indicator. There you've got a question, how much is a tooth worth?
Before, it could have been $5 or it could have been $1, but with inflation, who knows? So I'll give it back to you, Nathan.
I'll see if I can push that on my seven-year-old back at home. I think inflation's tough. We can't give you what you're used to. Maureen, I think you were going to ask a question we saw come through from the audience.
Yes. We've had a question come through both pre-submitted and during the live portion here about which industries or sectors will be most affected by what happens with tariffs, both negatively but also more positively. Any thoughts on that, Beth Ann?
Yeah, I can kind of take a stab at that. I'm going to go back to my Economics 101 book. One thing to keep in mind is I always have a hard saying this.
I will not try and say it three times, but price elasticity of demand. That is something that measures how much the quantity demanded of a good changes in response to a change in its price. So when you look at that, you can say it's calculated as kind of a percentage change in quantity demand. So here you can say sectors where consumers are most sensitive or more elastic to price changes, meaning that they will want to trade down or search for value or maybe even just wait. Retailers really struggle there, particularly for discretionary spending, meaning that people still have to buy their staples. They still have to buy the food to put on their kitchen table, but they can avoid spending on maybe nice luxury items like a fancy dress or a nice suit.
They might hold off and say, "Well, you know, I think I can wait a little bit longer before I go out, and sort of splurge." Vacations might be reduced. You might not take trips to Europe anymore or international trips because of costs. You might just do something close by, something local, or if you remember back when energy prices hit huge highs over, I guess the energy prices went to $5, gasoline prices went to $5 or more, and certainly in California, you might do a staycation instead. Restaurants are also hit. In terms of those that are inelastic, I mentioned staples, energy. Basically, everybody's got to fill up their tank of gas and go, so energy products are usually somewhat insulated, and I mentioned people don't want to splurge on spending on fancy stuff, but luxury goods.
People who have a lot of money can still spend on those luxury goods. Last thing I would say, in terms of cars, think about what would happen if you might say to yourself, "Yeah, I have this car, and I've had it for five years. Maybe I can wait and keep it for another year or two." Another sign of discretionary spending holding off. For the good side, what would be the good side? Well, I mentioned those industries that have inelastic demand, meaning that consumers have to spend no matter the price. But then the other thing is some companies are protected. Some industries are protected. Steel and aluminum, they're protected by the tariffs across the world. So there's an area that probably does get support. I'll stop there.
Awesome. Thank you, Beth Ann. Well, we are out of time, so thank you all again for joining us.
Thank you to Nathan and Beth Ann for your insights. Just a quick reminder that we will send out a survey when you close out of the webinar. Please take a moment to complete that, and the slides will be available after we conclude. You'll receive an email with a link to the recorded version of the webinar, which we encourage you to share with your colleagues who may have missed the live version, and you'll also get a link to the slides as well, so with that, we will conclude, and thanks again for joining us. We look forward to seeing you at our next webinar. Thanks again, and that concludes today's webcast.