US slowdown: waiting for Godot ? - May 19, 2025
The de-escalation of the trade war has allowed economists and investors to rule out recession scenarios. However, an economic slowdown in the US is still expected, although this is not what the statistics show at this stage.
On May 12, the US administration made a significant U-turn on the extravagant tariffs imposed on China. This de-escalation has reduced uncertainty and eased financial conditions (Chart 1) – with rising equities and lower credit spreads, among other things – significantly reducing the likelihood of a recession. The “reflexivity” dear to George Soros is fully at work here: financial markets are watching the economy, which is watching the markets.
Economists nevertheless expect that the increase in tariffs – which could reach 10% to 15% on US imports of goods – will reduce purchasing power and therefore consumption. Economists surveyed by Bloomberg predict that household consumption, which had risen by nearly 3% in 2024, will now grow by only 1% (annualized) on average per quarter until the end of the year. At this stage, however, there is no evidence to support this scenario. Retail sales (Chart 2) certainly stagnated in April, but this followed a very sharp rise in March, reflecting strong resilience. Following the publication of these statistics, the Atlanta Fed's GDPNow model calculates that consumption growth could reach +3.7% in Q2, well above the consensus forecast of +1%. Do these statistics reflect temporary effects – with consumers bringing forward spending ahead of price increases – or do they mean that the tariff shock is being absorbed more easily than expected ?
Data for May and June may help to clarify the picture, but this is not certain, as trade uncertainties remain high, which could prolong some of the temporary effects mentioned above. What seems certain, however, is that the US labor market is showing no signs of weakness. During the US corporate earnings season, for example, the issue of layoffs was rarely mentioned. As for jobless claims, as of May 10, they remained at the same low level as last year, at around 230,000 per week. This stability is all the more striking given that US households have been expecting a sharp rise in unemployment for several months (Chart 3). Whether on inflation or unemployment, survey data are struggling to show any predictive power, as we already noted in 2021/2022 during the inflationary boom. In this era of fake news and extreme polarization, has the wide gap, or even chasm, between measured perceptions and economic realities become a permanent feature of US statistical tools?
Recent developments, both in terms of the trade war and economic figures, are in any case pointing in the same direction, namely a downward revision of the macroeconomic risks perceived by investors. And if the US economic slowdown does materialize, we believe that the markets would then anticipate a stabilizing response from the US Federal Reserve. Dorval AM's flexible and diversified funds remain positioned accordingly.