MacroPass™: Lacy Hunt's Latest Quarterly Outlook

Economic activity from here will become “fitful, uncertain, and labored”

This week’s installment of our popular MacroPass™ service for premium members of this Substack comes from bond investor & former Federal Reserve senior economist Lacy Hunt.

It’s the latest quarterly review and outlook issued by Lacy’s firm, Hoisington Investment Management.

He sees five pivotal U.S. economic considerations, including tariffs, monetary policy, fiscal policy, debt overhang, and demographics, are aligning to depress economic growth for the balance of this year and into 2026

As a result, he sees the risk of recession is high, and the transition to meaningful recovery will be “fitful, uncertain, and labored”. That’s economist-speak for “Buckle up”

As a reminder, MacroPass™ is a weekly rotating selection of premium analysis from many of the big thinkers interviewed on Thoughtful Money.

To-date that list of contributors includes experts like Lacy Hunt (Hoisington), Stephanie Pomboy (Macro Mavens), Danielle DiMartino Booth (QI Research), Tom McClellan, Michael Howell (Capital Wars), Darius Dale (42 Macro), Doomberg, Ted Oakley (Oxbow Advisors), Kevin Muir (The Macro Tourist), Alf Peccatiello (The Macro Compass), Lance Lambert (ResiClub), Ed Yardini (Yardini Research), David Hay (Haymaker), Melody Wright (M3_Melody), David Stockman (Contra Corner), David Brady (FIPEST Report), John Rubino, Adam Kobeissi (The Kobeissi Letter), Sven Henrich (Northman Trader), Jeff Clark (The Gold Advisor), Charles Hugh Smith, Steven Bavaria (Inside the Income Factory®), Chris Whalen (The Institutional Risk Analyst), Felix Zulauf, Jesse Felder (The Felder Report), Brent Johnson (Macro Alchemist) and Anna Wong (Bloomberg Economics).

Recent MacroPass™ reports in this series include:

• David Hay on the potential upside of unloved energy stocks

• Anna Wong on the expected impact of the 'Liberation Day' tariffs

• David Stockman on just how out-of-control the federal deficit is

• Kevin Muir on 'The Bear Case' for markets

• Doomberg On the USA's fiscal outlook

• Michael Kantrowitz' on uncharacteristic economic green shoots

If you’re already a premium subscriber to this Substack, just continue below to access Lacy’s full outlook letter.

But if you’re not (yet), read the start of it below and consider upgrading to premium and access the full version, as well as all past and future MacroPass™ content.

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Converging Forces

Five pivotal U.S. economic considerations, including tariffs, monetary policy, fiscal policy, debt overhang, and demographics, are aligning to depress economic growth for the balance of this year and into 2026.

• First, the recessionary effects of tariffs, supported by compelling historical evidence and economic theory, will dominate the inflationary ones, potentially leading to a significant reduction in world trade and capital flows.

• Second, the Fed's continued maintenance of a highly restrictive monetary situation is significant and could have severe implications. A significant reversal in Federal Reserve policies this year is necessary for economic acceleration in 2026.

• Third, current federal spending plus the lagged negative multiplier effects from 2021 to 2024 will reduce economic activity this year. Benefits from the presumed tax reductions will impact 2026, but their delay will cause fiscal policy restraint for 2025.

• Fourth is federal indebtedness. After an unprecedented surge, the existing level of government debt will continue to drain economic activity. This pattern of excess debt restraining growth has been observed throughout history and noted by such outstanding thinkers as David Hume and Adam Smith in the eighteenth century; David Ricardo in the nineteenth century; Nikolai Kondratiev, Irving Fisher, Charles Kindlelberger, and Hyman Minsky in the twentieth century; and Carmen Reinhardt, Vincent Reinhardt, Kenneth Rogoff (RRR), Andreas Bergh, Magnus Henrikson, and others in the past 25 years.

• Lastly, the border closing also poses a very consequential drag on near-term economic growth.

Tariffs

Unintended Consequences

The philosopher George Santayana's words, "Those who forget the lessons of history are doomed to repeat it," ring true in current economic policy. The currency devaluations by the Dutch East Indies and Australia in the late 1920s, which quickly led to multiple country currency devaluations, the Smoot-Hawley Tariff Act of 1930, and devaluations of the British pound and U.S. dollar, respectively, in 1930 and 1933, serve as stark reminders of the unintended consequences of economic decisions. Similar "beggar thy neighbor" (BTN) practices occurred until the start of World War II, contributing to deflation and severely suppressing world economic activity. Basic economic theory was at work. Except for energy products, the demand for nearly all internationally traded goods is price elastic. This price elasticity means, in percentage terms, the fall in demand will be far greater than the associated tariff-caused price increase, resulting in a drop in total revenue.

The world is witnessing a unique high-stakes game where every player wins or loses big.