Over? Did You Say Over?
The growth scare is proceeding as we expected, but trade policy implementation tactics threaten to delay the recovery in capital spending.
Over the past three weeks, since we published Cleaning Up the Industrial Policy Mess, there has been growing concern about the US economy's soft patch, influenced by reduced government spending, employment, and destabilizing trade policy communication. We reached our Treasury market 4.20% 10-year target in a week, and 10-12% S&P 500 correction in 3 weeks. Some of our clients are increasingly concerned the Trump agenda is running off the rails and the risks of a more severe economic downturn than previously anticipated are growing.
In this week’s note we address the following topics:
Economic Slowdown Reduced government spending and employment are expected to weaken GDP and GDI in the first half of 2025, with a recovery in private sector investment likely not gaining traction until the second half of the year.
Investor Concerns Investors are increasingly worried that the Trump administration's trade policy is causing economic risks beyond a soft patch.
Impact of Trade Policy The administration’s trade policy is seen as destabilizing markets and business confidence, with a need for better communication from the economic team.
Capital Spending Data Recent data shows a significant decline in capital spending plans, particularly in manufacturing construction, which is crucial for the 2025 economic outlook. Fresh capital spending plans data begins on Monday.
Consumer Spending Consumer spending has slowed sharply from the fourth quarter of 2024, as indicated by various retail sales reports.
Labor Market Dynamics The labor market shows weak demand for lower-wage workers and a collapse in churn, suggesting instability.
FOMC Policy The Federal Open Market Committee (FOMC) should focus on facilitating the transition from government spending-driven growth to private sector investment, rather than leaning against tighter trade policy.
Market Risks Despite achieving price objectives, there are risks of credit spreads widening disorderly, which could impact leveraged floating rate borrowers.