Weakness expected in US consumption

Since 2020 personal consumption has accounted for more than four-fifths of all GDP growth. Now though, this key growth driver is beginning to falter as US consumption data indicates falling real restaurant sales, building materials and auto sales. This deceleration has pushed the Atlanta Fed’s GDPNow model’s estimate of Q1 real PCE growth down to just 0.4% and now estimates that first quarter GDP growth was just 0.2% after adjusting for the abnormal surge in gold imports earlier in 2025.

It is not just the Fed’s model, sentiment surveys conducted by the Conference Board and the University of Michigan indicate a sharp deterioration in consumer spending confidence – see Figure 1.

Figure 1 – Consumer sentiment is deteriorating

While the impact of Trump’s tariffs on falling consumer confidence cannot be ignored, even before the trade war began, consumer finances were looking stretched. Figure 2 illustrates our point. Over the past two years, US excess household savings have steadily declined and are now depleted.

Figure 2 – A little over two years later, and pandemic savings are now depleted

With the $2 trillion in savings depleted, and little other savings available, many households have inevitably had to turn to borrowing. However, even here the US consumer is showing signs of strain. Delinquency rates on credit cards and auto loans are rising to levels last seen in 2011 – see Figure 3. The last time delinquencies were this high the unemployment rate was double today’s level.

Figure 3 – Delinquency rates are now at 2011 levels

Unemployment fears are rising

The true risk of lower consumer spending is the cycle of economic decline that it can set off. When consumers spend less, businesses generate lower profits, and many are forced to cut back on production and staff. This leads to increased unemployment, less income for consumers, and eventually even lower consumer spending – and the cycle continues.

The tangible impact of the above can be observed in the job openings rate which has continued to slide, from 7.6% three years ago to 4.6% in January of this year. Worryingly, the current level is close to the 4.5% threshold identified by Fed Governor Christopher Waller as the point at which any further decrease in job openings could trigger a material cycle of rising unemployment.

Figure 4 plots real-time indicators of job openings from Indeed and LinkUp, which are also suggesting that job vacancies fell even further in February and March. Surveys produced by the University of Michigan, Conference Board and New York Fed all echo this sentiment, as respondents expect that unemployment will be higher one year from now – see Figure 5.

Figure 4 – Job openings have declined materially

Figure 5 – Survey respondents are concerned about the rise of unemployment

The broader media typically focuses on initial unemployment claims (a claim filed by an unemployed individual after a separation from an employer) to measure the strength of the labour market. However, as unemployment claims can only be submitted after an individual becomes unemployed, this metric is typically a lagging measure of the labour market’s health.

If firms begin to experience declining profits, due to decreasing demand, they typically stop hiring well before they begin firing employees. Therefore, we believe the hirings rate is a far more timely indicator of when an economy is entering a recession.

Figure 6 panel 1 depicts just how much hiring has fallen over the last 3 years. As illustrated by the grey bars, anytime in the last 25 years hiring has slowed this much, it has coincided with a recession. Furthermore, aside from COVID-related periods, the number of layoff announcements – which typically precede actual layoffs – have not been this high since 2008.

Figure 6 – Hiring is declining while layoff announcements rise

The shock that could start a recession

A weak economy often needs one final shock to push it over the edge, and into a recession. In the case of the US economy, we believe that Trump’s tariffs, and the continuing trade war, might just represent such a shock.

There are several real-world impacts that we believe the trade war could have. First, tariffs will likely lead to higher consumer prices, in turn, depressing real consumer incomes. This may already be happening as February saw import prices rise 0.4%, well above the Bloomberg consensus estimate of a 0.1% decline. Looking further out, the CPI swap market expects that inflation will rise to around 3% over the next 12 months.

In addition, if inflation does move upwards, the Fed’s ability to cut rates in response to an economic contraction will likely be curtailed as they work to strike a balance that does not allow inflation to expand further. Figure 7 below depicts how the recent period of higher inflation has led to the PCE price index rising 1.2% higher than if prices had simply risen by 2% since the Global Financial Crisis. In other words, for many years the Fed has had the ability to cut rates in response to economic contraction as prices remained below their long-term inflation target. However, now with prices above it, the Fed is forced to tread carefully when implementing future rate cuts.

Figure 7 – Prices are now above their long-term trendline

Any increase in costs due to higher tariffs that companies can not pass on to consumers will have to be absorbed by them. Therefore, while the extent that tariffs raise costs for companies is unknown, in an environment of already slower economic growth, it is likely that corporate profits will fall. Falling profits will inevitably lead to further economic contraction.

It is not just the impact of the tariffs themselves, but also the manner in which the Trump administration has rolled them out. With no clear policy and instead news headlines reporting different tariffs almost daily, business uncertainty has spiked. In this uncertain environment, companies cannot plan for the future and are to some extent forced to sit on their hands – abstaining from making hiring or investment decisions until they have a clearer view of the way forward. In fact, the IMF has estimated that the damage to growth from tariff uncertainty could be as large as the tariffs themselves.

Finally, foreign governments will very likely retaliate against US tariffs. This retaliation will not only include higher tariffs on US exports but will quite likely lead to the deterioration of trade. For example, Canada and Portugal have said that they are reconsidering their F-35 fighter jet orders. For context, the US exported $320 billion in military equipment in 2024, accounting for 15% of total goods exported.

Limited capacity for monetary or fiscal stimulus

How severe a recession is will depend on the magnitude of the economic imbalance (excessive debt, asset bubbles, etc) and the aggressiveness of the monetary or fiscal policy response. For example, during Covid while the imbalance was deep, the lockdowns were short and the policy response was strong, leading to a very short recession and strong recovery.

Unfortunately, this time around, we believe the policy response will be more muted. The risk of tariffs pushing inflation higher will limit the Fed’s willingness to cut rates aggressively. On the other hand, fiscal policy will likely be hamstrung by the highly indebted position of the US public sector. When real yields were low, refinancing federal debt was not a major problem. However, now that rates are higher, that is no longer the case. Figure 8 illustrates how the interest expense on federal government debt (measured as a share of GDP) has doubled since 2016 and is set to double again over the next 10 years.

Figure 8 – Interest costs on federal debt are expected to rise to new highs

Thus, instead of the public sector being able to ease policy to support the economy, the government may actually need to implement budget cuts of between 2.5% and 3% of GDP to bring the deficit down to a sustainable level. In fact, DOGE, which is tasked with increasing government efficiency, may be evidence that this is already happening.

Investment takeaway

Given that the risks to global growth are firmly to the downside, we have positioned our portfolios overweight defensive equities, cash, and bonds and have implemented hedging strategies, where applicable.

If you are interested in finding out more about how cognisance of the macroeconomic backdrop impacts our investment decision making process, connect with Integrity Asset Management and let us help you navigate your investing journey.

For more information on this synopsis or to discuss solutions provided by Integrity Asset Management, please contact us at:

Tel: (021) 671 2112
Cell: 072 513 2684 / 084 601 1025
E-mail: nic@integrityam.co.za / herman@integrityam.co.za

 

Source: Bloomberg, 31 March 2025