Trump-slump?

The US economic cycle has appeared to be creaking a little this last couple of weeks. Retail sales, consumer confidence and an important survey of businesses in the service sector are among the data points lining up gloomier than forecast. Could the US economy already be sagging under the gathering weight of policy noise?

The fundamentals

There remains much to admire about the US economy. The all-important US consumer remains in formidable shape¹ – in net worth terms, US households command $50trn more than at the end of 2019. Even accounting for the intervening inflation spike, that is an increase of some 20%.

Mississippi, one of America’s poorest states, now produces more per person than some of Europe’s richest countries. Meanwhile, real incomes are growing briskly, with most people who want work finding it.

The surge in new business formation that followed the pandemic cheques has stuck, yet another eerie echo² of the mid-90s productivity surge. Meanwhile, America’s corporate giants are both innovating and investing at an eye-watering pace.

These are just some of the reasons why the world craves US assets. Whether you are looking for a store of value or inflation-beating title, the US has long-proved too exceptional to ignore.

The new US administration is nonetheless unhappy with this state of affairs. The evaporation of manufacturing jobs, as elsewhere in the developed world, has inflicted tragedy³ on now seething populations. Unfair international trade and the primacy of Wall Street are seen as culprits.

Setting this right, whilst dishing out MAGA-realism to friends and foes alike in the international sphere, seems to be the ambition. All this needs to be done, on top of a lot of Congressional slog on a tax cut, before the US electorate offer the traditional mid-term slap.

But…

It remains hard to see how serious or literal the US administration is on any of this. Many will wonder whether the focus on restoring domestic manufacturing jobs is quixotic, with the last administration doing as much as one can sensibly (and successfully) play for anyway.

Long-term trends in manufacturing employment look very similar to those in farming in prior centuries. Incoming machines gifted farmers increasingly potent superpowers, allowing them to employ fewer people whilst producing ever more over the centuries. Now agriculture represents a tiny percentage of employment in most rich countries (Figure 1).

Figure 1: The evolution of different segments of the US labour force from 1800 to 1980

Source: Beninger, Barclays

Factories without people are already a thing and will surely proliferate. That will admittedly remove the need to put them wherever the cheapest workers can be found, but the actual jobs will be few and far between.

What can investors do?

The global craving for US assets these last few decades has left many of them looking pricey. There is a slice of this premium valuation that cannot easily be explained by profitability, size or growth prospects.

This is the cream given only to the hegemon, the financial ruler of the world and provider of its currency. The US ostensibly stepped into this role after it was vacated by an exhausted Britain around a century ago, though the writing had been on the wall for some time before.

To this extent, investors have both a cyclical and structural question to ponder. There can be no firm answers to either – and strident responses should be taken as a sign of ignorance not deep insight.

A recession still seems unlikely on our estimation. The US economy still has too much going for it, even with that more disruptive force in the highchair. Confidence, where much of the recent swoon has shown up, has always been hard to accurately measure. There is some evidence that this is even more the case in the wake of the pandemic. Meanwhile, the ever-jagged teeth of the business cycle may explain much of the rest.

Nonetheless, we have observed and acted on a mismatch between investor expectations and reality. Even without recession, too much is expected of many US assets, including some of the technology titans. The response to Nvidia’s incredible quarterly numbers and guidance last night is surely indicative.

On the other side, expectations have been too meek, even bleak, with regards to parts of Europe and Asia. This year has already witnessed some correction to these extremes. The next few weeks will be key to discerning whether there is further to go.

The March meeting of China’s top governing body will be interesting to watch. The appearance of a paragraph on Hukou reform in Central Document No.1, the first policy statement of the year and traditionally an important harbinger of policy direction, could be important.

Chinese workers are undercompensated for their productivity, a fact at the centre of the very global imbalances in trade and finance flows that this US administration is so vexed by⁴. Meaningful reform to the social safety net would help supercharge the optimism spreading from DeepSeek’s breakthrough and the symbolic return of Jack Ma from the cold.

We’ve been here before of course – hope rather than expectation is likely appropriate. However, as with Europe⁵, there is a sense of stars aligning to force policy in a direction that may help wean investors from their craving for all things US.