Key Takeaways
- Recent economic numbers in the US have worsened, with consumer confidence and spending down.
- Despite these negative trends, fundamentals in the US economy remain strong and inflation appears to be under control.
- Tariff threats have unsettled consumers and importers, yet the overall economy remains resilient.
- Credit conditions continue to support lending to small firms and consumers, and wage inflation is slowing to align with the Federal Reserve’s 2% target.
- We expect interest rates to fall – a trend that should support solid growth and positive outcomes for risk assets throughout the year.
The economic numbers in the US have taken a decided turn for the worse recently. Consumer confidence has tumbled, consumer spending was weak in January and the closely watched composite purchasing managers’ index has fallen sharply, from a robust 55.4 in December to a distinctly weak reading of 50.4 in January. US consumers apparently don’t like all this talk of tariffs and numerous government employees and contractors to the Federal government are scared that they will lose their jobs. Indeed, initial unemployment claims have jumped by 26,000 in the last two weeks.
So, is the exceptional outperformance of the US economy at end? We take a step back and conclude that the fundamentals remain good in the US. We also think that inflation is under control there and that big interest rates cuts are on the way.
Let me explain why. First, there is no doubt that the tariff threats are unsettling for US consumers and importers alike. But they do not pose a threat to the overall economy: the US is a relatively closed economy and while some US companies suffer from tariffs, others gain as their competitive position improves. Second, while consumer spending was weak in January, this followed some strong months, and the underlying trend seems firmly upwards. Third, there are still significant tailwinds from credit conditions which are favouring lending to small firms and consumers. We are a little more concerned about Elon Musk’s aggressive approach to cutting spending but once again, we expect that this will settle down over the next few months.
There are also some major positives on the inflation front. Wage inflation is clearly slowing and looks set to reach a level consistent with the Federal Reserve’s 2% inflation target this year. Rents which represent a huge chunk of the CPI are also slowing. The US is enjoying the unwinding of the wage-price spiral – wage inflation is slowing but price inflation has fallen faster so real wages are rising. The market is beginning to agree with our view of significant rate cuts in the US this year.
There is a great deal of noise in the data at present. But looking through it all, we still see good, solid growth in the US over the rest of the year. With interest rates falling, this all adds up to good news for risk assets.
