Chris Clothier, Co-CIO, CG Asset Management, commented: “American businesses and consumers look on with concern. In the last quarter’s update we noted that the US economy was appearing to slow. We wondered what, if anything, might bring American exceptionalism to an end. Now we have a candidate: President Trump.
“Immediately after the election there was a surge of business optimism. This has since ebbed away. The to-ing and fro-ing on tariffs has left businesses not knowing where they stand. When faced with uncertainty they sit on their hands. This is starting to show up in business surveys for capital spending. The NFIB survey is nearly at its Covid lows and the more volatile regional Fed surveys are trending downwards.
“Nor is it just businesses that are showing caution. Consumer sentiment is poor and inflation expectations are rising. The savings ratio has been a concern to us for some time. It reached a low of 3.3% in December. With the froth coming out of the stock market the wealthy are likely to revert to more normal consumption patterns and lower earners will likely adjust their consumption too.
“The budget proposals may make matters worse. They envisage tax cuts of $4.5 tn over 10 years and $2 tn in spending cuts. The spending cuts, if enacted, will largely fall on entitlement and welfare programmes: Medicaid and SNAP (Food Stamp Programme). One in five Americans benefit from Medicaid. Faced with the threat of its withdrawal, Americans may opt to dramatically increase their precautionary savings.
“The probability of a recession is rising rapidly, though is by no means a certainty. President Trump’s reaction function will be interesting. In his first term, he set much store by the stock market’s level. Recently President Trump and his lieutenants have suggested that a recession might be an acceptable price to pay to bring about the “golden age of America [that] begins right now.”
Chart 1: NFIB Survey – Capital Expenditure Plans:
Chart takeaway: the surge of optimism has given way to nerves
