- Consumer sentiment is soft, but spending is robust.
- Public sector is beginning to subtract from growth, offset by surging private cap-ex.
- Unemployment is low, but firms’ hiring intentions have cooled sharply.
- Trade and immigration related uncertainties are key drags.
- Growth in the 1.5-2% range remains on the cards, although there are plenty of risks in play.
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Commentary: US economy’s mixed signals
Yield curves suggest expectations of lower rates to support a slowing economy, while stock markets project rosy times. Jobs data point toward a loss of labour market momentum, but retail sales show consumers still going strong. The US economy is offering decidedly mixed signals going into the final leg of 2025.
First, the good news. We estimate that retail sales are tracking high single digit annualised growth rates. Consumer sentiment may be on the weak side, but the actual spending is robust. Both consumer and business expenditures, despite tariffs, have been strong, with total imports up 11%yoy through July. PMI surveys still point to a modest rate of expansion, although manufacturing appears a tad weaker than services. Public sector’s contribution to growth is waning, but it is being offset, for now, by an historic rise in AI-related spending. Putting it altogether, the US economy is far from a recession. In fact, Atlanta Fed’s Nowcasting is picking up an increase in economic momentum, driven by surging private investments.
But current momentum should not be conflated with the outlook. Policy uncertainties, ranging from tariffs to government shutdown, remain heightened. The job market has cooled a tad, but more critically, many indicators point toward further cooling ahead. Private sector surveys in September reported that companies’ hiring plans so far this year were the weakest since 2009. Federal government related job cuts and a rising reluctance to add workers amid AI-induced disruption have been clouding the picture through the course of this year. Immigration measures have also pushed up the cost of hires, adding to the gloom in the near-term jobs picture.
Would Fed rate cuts ameliorate this situation? We have our doubts. Cost of capital is not high on the list of difficulties faced by businesses, and hence a decline in interest rates is unlikely to make matter considerably better. Reduction in policy uncertainty, easing of immigration measures, and a decline in the cost of doing business could help, but we see relatively small chance of these factors working out in the near term. It is possible that favourable treatment of capital expenditure under the 2026 tax laws could usher in a jump in non-tech investment next year, helping the labour market. But even that would require a turnaround in business confidence, which would necessitate a sharp reduction in policy, especially with respect to trade and immigration.
The US economy could readily grow by 1.5-2% in the coming years, just on the back of private sector cap-ex. Even if consumers scale back a tad amid federal level job losses, there are sufficient ingredients in place for recession worries to be put to rest, in our view.
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