- AI and energy-related spending would like boost US capex for many years to come.
- Tax refunds, tax cuts, and investment incentives are coming from the budget.
- Already easing rates to support mortgage financing and investment.
- Tightening labour supply would boost wages of legal workers.
- Weakening dollar to increase overseas earnings of US firms.
Commentary: The no-recession scenario
Latest data on labour market and consumer prices point toward dissipating economic momentum and higher inflation. Fed officials have been communicating that the former is a graver concern than the latter, necessitating imminent policy support. Analysts therefore almost universally expect a rate cut at the conclusion of the FOMC meeting this week and several more in the coming months.
Have rate cut expectations gone too far? Latest market pricing point to 150bps in cuts; an outright recessionary scenario. But there are many aspects of the US economy and financial markets that look healthy. Having recognised sporadic signs of weakness, we nonetheless remain firmly in the no-recession camp. Consider the following six factors:
First, AI-related spending: The US economy is leading the world in an historic spike in tech investments, mostly related to data centres and hardware to train and execute Large Language Models. With hundreds of billions spent this year and more in the pipeline for many years to come, this secular surge in investment would likely be as important a contributor to growth as consumption, typically the mainstay of the US economy.
Second, spending on energy: The electricity needs of the tech sector are surging, causing a spike in investment in power generation. From renewables to natural gas, small nuclear reactors to oil, the US makes up 25% of global investment in energy, and all signs are pointing to further momentum in this sector in the coming years.
Third, fiscal boost: Various tax benefits for the household and corporate sectors stipulated in the recently passed One Big Beautiful Bill will be trickling through the US economy in the coming quarters. Additionally, tax refunds starting January 2026 could be as much as 20% higher for 70% of American households. This would likely be a substantial support for consumption.
Fourth, lower interest rates: Expectations of economic slowdown and Fed cuts have already begun to push down interest rates, from consumer loans to mortgages. For the corporate sector, this would provide additional incentive to borrow from the public and private markets to boost AI-related spending.
Fifth, tight labour market: Jobs growth may be weakening, but the Trump administration’s immigration crackdown is also causing a tightening of labour supply at the low end of the wage spectrum. As companies struggle to hire workers in construction, hospitality, agriculture, fisheries, and other services, they will be forced to pay higher wages to legal workers.
Sixth, weak dollar. The US is not a very trade intensive economy, with trade’s share of GDP amounting to 25%, but its large companies derive substantial income from overseas. Almost 60% of S&P500 listed companies’ sales come from outside the US, which would be boosted by the 10%+ weakening of USD this year. That will help their earnings sizeably.
Couple the above with healthy corporate and household balance sheets and ample liquidity, the case for a US recession in 2025 or 2026 appears to be a weak one. We forecast real GDP growth rates of about 1.5% in both years.
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