Concerns are growing about the health of the US economy as businesses and households struggle to weather the disruption caused by the first months of Donald Trumps’ presidency.
The world’s largest economy has been the standout global performer for the past couple of years, with growth far outstripping other advanced economies.
But data over the past week has come in markedly below expectations, driven by fears about tariffs and the possible effects of Elon Musk’s attempt to slash federal spending.
“Investors are once again seriously considering whether US exceptionalism is fading,” Kyle Chapman, FX markets analyst at Ballinger Group, said.
Consumer woes
The latest consumer confidence survey from the Conference Board, which was published yesterday, showed the sharpest deterioration in three-and-a-half years during February.
Labour market indicators also worsened, with more respondents saying jobs were harder to get.
In fact, the difference between those reporting that jobs were plentiful and those who thought they were hard to get fell to the lowest level since October, suggesting unemployment will creep up.
Source: Conference Board.
Fears about employment reflect Musk’s efforts to slash the number of people employed by the federal government. According to Apollo Global Management, DOGE-related layoffs could number 1m, when including the federal contractor workforce as well as full-time staff.
Tuesday’s survey came hot on the heels of another consumer sentiment index, released at the end of last week, which also showed depressed household optimism.
Samuel Tombs, chief US economist at Pantheon Macroeconomics, said consumers were “finally smelling the coffee”, with tariffs set to increase prices and spending cuts likely to impact jobs.
The Conference Board’s survey showed another increase in inflation expectations, with households factoring in price rises of six per cent this year, partly due to Trump’s tariff threats.
“Consumers’ confidence has deteriorated sharply in the face of threats to impose large tariffs and to slash federal spending and employment,” Tombs said.
Neil Wilson, analyst at TipRanks said the consumer surveys had called into question “the two pillars of the US story of growth,” namely strong household spending and a resilient labour market.
Private sector downturn
The latest purchasing managers’ index (PMI) reading for February, released last Friday, put private sector activity in the US economy at a 17-month low, well below expectations.
Output in the services sector slipped into negative territory for the first time in over two years, with respondents again pointing to the impact of federal spending cuts on activity.
And while there was an improvement in manufacturing, the PMI noted that this was likely a temporary surge as firms tried to beat the imposition of tariffs.
“Many manufacturers also reported that the rise in production and demand was in part linked to front-running potential cost increases or supply shortages linked to tariffs,” the survey said.
Source: S&P
Trump has already imposed a blanket 10 per cent tariff on imports from China as well as extra duties on aluminium and steel imports.
He has promised to impose ‘reciprocal’ tariffs on all of the US’ trading partners in the coming months, which many economists have warned will cause major disruption.
The survey showed that business optimism in the year ahead has fallen to its lowest level since December 2022, when markets were concerned that the Fed’s rate hikes would trigger a recession.
“The buoyed mood that followed the election has vanished, and instead they have now been spooked by the torrent of policy changes and the uncertainty around tariffs, government spending, and inflation,” Chapman said.
With concerns around the growth outlook building, traders now anticipate the Fed to cut interest rates twice this year. Just a few weeks ago, many thought the Fed would remain on hold all year.
Markets subdued
Kathleen Brooks, research director at XTB, said it was a “delicate time” for the world’s largest economy, which has had a knock-on effect on US stock markets.
The S&P 500 closed lower for the fourth day in a row on Tuesday, marking the worst run so far this year, while the Nasdaq lost over one per cent for the third day running. This puts US equity markets on their worst run since last August.
Despite the subdued short-term outlook, many analysts noted that Trump’s pro-business measures – such as tax cuts and deregulation – would likely take some time to have an effect.
“The stimulative plans from tax cuts and so forth will take much longer, if not years, to add to the economy, and so there’s a little bit of a timing problem with how fiscal policy is evolving right now that could cause a slowdown,” Guy LeBas, chief fixed income strategist at Janney Montgomery Scott said.