The US economy: suspended animation

Good morning. While the financial world has been laser-focused on one geopolitical crisis — the trade war — two others are heating up in Asia. China is provoking the Philippines in the South China Sea, and tensions between India and Pakistan are high after killings in Kashmir. Unhedged tends to play down the market impact of geopolitics. But this is, at the very least, seriously bad timing. Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.

We ain’t seen nothing yet

The difficult thing to grasp, after all the volatility and agita of the past three and a half weeks, is how strong the economy is right now, according to the most fundamental indicators, and how little future trouble is priced into markets. Not that much bad stuff has happened, and the market is projecting that not that much bad stuff will.

The labour market is stable. Initial jobless claims reported last week were 220,000, on the low end of trend for the past few years. Retail sales are on a rising trend in real terms, as are personal incomes. Yes, the big economic readings are backward facing, the trade shock has not had time to appear in the numbers, and there are some worrying noises around the edges — for example in housing. But the market is telling you that bad news is not on the way. The S&P 500? Still within 10 per cent of its staggering all-time high of February, consensus expects earnings to grow 10 per cent this year, and the index’s forward price/earnings ratio is a plump and cheerful 21. Credit spreads have widened some but in recent days they have come down again:

For some, the image all this will bring to mind is Wile E. Coyote: off the edge of a cliff, legs still spinning, and suspended in mid-air so long as he doesn’t look down. I don’t think this is quite the right metaphor, though. Markets are volatile, dispersed and confused. But the valuations of risk assets speak to a fundamental consensus that the Trump administration’s most damaging tariff proposals, including its embargo-level duties on China, will not stand for long. Perhaps this will be because, as the administration hopes, other countries will come to the table and deals will be done quickly; or perhaps they won’t stand because the administration will back down in the face of market pressure and angry consumers. The market won’t mind either way. 

This optimistic consensus is not blindly ignoring gravity. The administration has already shown a strong propensity to fold: on Chinese electronics, the non-China “reciprocal” tariffs above 10 per cent, and on the Fed. It is up to the Trump doomers to tell us why we should expect this pattern to change. 

This analysis is based on macroeconomic data and observation of White House behaviour. But it is worth moving down from high abstraction and looking at some details. In particular, several important consumer companies reported results last week, and had some interesting things to say about US households.

The CEO of Colgate, which saw unit volumes fall in North America in the first three months of the year, said that “the macroeconomic and consumer uncertainty we saw in the first quarter, not just in the US but also in other countries around the world, had a negative impact on volume growth,” just as one might expect. But the trend has been a bit better in March and April, and he’s optimistic: 

Consumers will come back. They’ve destocked some of their pantries, but these are everyday use categories . . . we have an expectation as we built into our guidance that categories will come back in the medium term . . . the early signs that we’re seeing in April, at least give us some confidence that categories will slowly come back as the consumers settle down and the economic uncertainty that surrounds the markets around the world improves

Procter & Gamble managed 1 per cent volume growth in North America, as compared to a 4 per cent growth trend in the prior five quarters. The company put the change down to both a weaker consumer and falling inventories. Here’s the CFO: 

The consumer has been hit with a lot, and that’s a lot to process. So what we’re seeing, I think, is a logical response from the consumer to pause. And that pause is reflected in retail traffic being down. It’s also reflected in somewhat of channel shifting in the search for the best value, shifting into online, shifting into big box retailers, and shifting into the club channel in the US specifically. All of that put together means consumption levels are down in both Europe and the US 

The word “pause” is doing a lot of work there, and echoes the Colgate view that the economic environment will soon “settle down.” Other consumer facing companies also voiced the notion that consumers would hang tough. Kimberly-Clark, which makes paper towels, nappies, and the like, talked about “resilient demand” even as “affordability has become paramount”. The CEO of O’Reilly Auto Parts emphasised that replacing a part is a lot cheaper than buying a new (tariffed) car:

We believe we’re in a market where consumers are placing a high value on investments in their existing vehicles and will continue to be motivated to avoid the significant cost and monthly payment burden that comes with a new or replacement vehicle . . . most of this [tariff] uncertainty was in the headlines and had yet to make its way to anything we would characterise as notable impact to our day-to-day business

Overall, the picture sketched by the consumer companies looks a lot like the one visible in the macroeconomic and market data. Things are slower, but hardly terrible, and should improve when and if the craziness comes off the boil.

Fair enough, but how confident are we that the craziness will, in fact, subside? Consider this slide from Procter & Gamble’s earnings presentation, describing the factors excluded from the company’s 2025 targets:

Unhedged agrees. So long as growth holds up, currencies stabilise, commodity inflation is tame, there are no political crises, supply chain integrity is maintained, and tariffs are not increased, everything will probably be fine.

Consumer credit

One of the economic indicators that is fine for now — but a shade wobbly at the margins — is consumer credit volume and quality. Last year, Americans were borrowing and spending robustly, if not indulgently. Revolving credit volumes hit a record high in October. Issuance started to come down at the end of the year, however, and flatlined throughout the first quarter of 2025:

Whether the fall shows pressure on households or a normalisation is hard to say. It could be that consumers have finally run out of their savings cushions from the pandemic — as suggested by rising delinquency rates among younger, poorer Americans. Or it’s possible that US consumers are starting to step back due to concerns about a recession or slowdown. We just don’t know.

Other data series don’t give any clear answers. The proportion of banks that said they are tightening lending conditions on businesses and commercial clients increased a bit in the first quarter. But on consumer credit, banks are loosening up:

Looking at the big banks, the picture to this point has been slightly more positive. Last quarter, Bank of America, which is relatively conservative in its lending, saw credit issuance increase and delinquency rates decrease. JPMorgan and Chase had less rosy, but still solid results: its lending decreased slightly, and, though it saw a modest increase in delinquencies over the past 12 months, delinquencies were at the same level as this time last year. 

But the banks’ outlooks were a touch more pessimistic. In its comments to analysts, Citigroup said a “deterioration in the macroeconomic outlook” could be coming; BofA more charitably noted “a changing economy”, which could affect its business. And both Citi and JPMorgan are adding to their reserves to buffer against consumer credit losses.

The most negative indicator we have got so far was from the Fed. As of last week, a record proportion of households are paying just the minimum monthly payment on their credit cards (chart courtesy of Torsten Slok at Apollo), suggestive of a serious slowdown. But it is possible that, like other credit quality indicators in recent years, this one speaks to problems that are confined to the low end of the credit spectrum — households with lowish incomes and high, variable rate debt.

It is hard to read the economic tea leaves at the moment. Economists and commentators like us have the privilege of waiting for the data to speak less equivocally. Investors are not so lucky.

(Reiter)

One good read

On pronataliism.

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