The US Economy: Frozen in Time

Good morning. While the financial sector has been intensely focused on one geopolitical issue — the trade war — two other crises are escalating in Asia. China is causing tensions with the Philippines in the South China Sea, and India and Pakistan are experiencing heightened tensions following incidents in Kashmir. Usually, Unhedged downplays the market effects of geopolitics. However, this situation comes at a notably bad time. Feel free to email us at robert.armstrong@ft.com and aiden.reiter@ft.com.

The Calm Before the Storm

The challenge after weeks of significant market fluctuations is understanding how robust the economy is right now, as indicated by key metrics, and how little adverse developments are currently reflected in market pricing. Not much negative has happened yet, and the market suggests that it doesn’t expect much negativity moving forward.

The job market remains steady. Last week, initial jobless claims were reported at 220,000, which is on the lower side of the trend seen over the last few years. Retail sales are increasing in real terms, as are personal incomes. Although significant economic indicators often reflect past conditions and the negative effects from trade issues haven’t yet materialized in the data, and while housing shows signs of concern, the market is signaling that bad news likely isn’t on the horizon. The S&P 500? It remains within 10 percent of its record high from February, with expectations for earnings growth of 10 percent this year, and its future price/earnings ratio is a healthy and optimistic 21. Although credit spreads have widened a bit, they have recently decreased:

Some might liken this situation to Wile E. Coyote: plunging off a cliff, legs still flailing mid-air, as long as he avoids looking down. However, I don’t think this analogy fits perfectly. Markets are indeed volatile, scattered, and uncertain. Nevertheless, the value of risk assets suggests a basic agreement that the most harmful tariff measures proposed by the Trump administration, including substantial duties on China, won’t remain in place for long. This could be due to other nations negotiating quickly with the administration or the administration relenting due to market pressure and public dissatisfaction. The market seems unfazed regardless of the outcome.

This prevailing optimism does not ignore the serious risks. The administration has demonstrated a tendency to backtrack: regarding tariffs on Chinese electronics, the non-China “reciprocal” tariffs exceeding 10 percent, and even stances related to the Fed. It’s now on the Trump pessimists to explain why we should expect a shift in this pattern.

This evaluation is rooted in macroeconomic data and observations about behaviors from the White House. However, it’s useful to shift focus down to specifics. Recently, several significant consumer companies shared insights about American households.

The CEO of Colgate noted that although unit volumes in North America declined during the first quarter, there appears to be improvement in March and April. He stated:

Consumers will return. They’ve reduced their stockpiles, but these are everyday items. We expect these categories will recover in the medium term. The early signs we’re observing in April instill some confidence that demand will gradually rebound as consumers adapt and global market uncertainties lessen.

Procter & Gamble reported a 1 percent increase in volume in North America, which is down from a 4 percent growth trend seen over the past five quarters. The company attributes this decline to a weaker consumer market and lower inventory levels. The CFO remarked:

Consumers have faced considerable challenges, which they are processing. We observe a reasonable response from consumers, resulting in diminished retail traffic. Moreover, there is a noticeable shift towards seeking better value by moving to online shopping, larger retailers, and specifically club channels in the U.S. This combination has led to reduced consumption in both Europe and the U.S.

The term “pause” carries significant weight and mirrors Colgate’s view that economic conditions will soon stabilize. Other consumer-facing firms echoed this sentiment. Kimberly-Clark, which produces paper products and baby items, mentioned “enduring demand” despite an increased focus on “affordability.” O’Reilly Auto Parts highlighted that replacing parts is much cheaper than purchasing a new (tariff-affected) vehicle:

We believe consumers prioritize investing in their existing cars and are motivated to avoid the high costs and monthly payments associated with new vehicles. Most tariff-related uncertainties have not noticeably impacted our daily operations.

All in all, the perspective from consumer companies aligns closely with macroeconomic and market data. Conditions may be slower, but they aren’t dire, and improvement is expected if current tensions ease.

However, how certain are we that these tensions will truly calm? Let’s consider a slide from Procter & Gamble’s earnings presentation that outlines factors excluded from its 2025 projections:

Unhedged concurs. As long as growth remains steady, currencies stabilize, commodity prices don’t see excessive inflation, political crises are avoided, supply chains function properly, and tariffs are not raised, everything should be manageable.

Consumer Credit

Currently, one economic indicator that appears stable, albeit slightly uncertain at the margins, is consumer credit volume and quality. Last year, borrowing and spending among Americans were robust, without being extravagant. Revolving credit levels hit a record high in October. However, issuance began to decline at the end of last year and remained stagnant through the first quarter of 2025:

Whether this decline indicates pressure on households or simply a return to normalcy is unclear. It’s possible consumers have depleted their savings built up during the pandemic, as suggested by rising delinquency rates among younger, lower-income individuals. Alternatively, Americans might be pulling back due to fears of a recession or economic slowdown. The answer is not yet known.

Other data trends do not paint a consistent picture…

There haven’t been any definitive responses yet. The number of banks indicating they are tightening lending standards for businesses and commercial clients saw a slight increase in the first quarter. However, banks are becoming more lenient with consumer credit:

Focusing on the major banks, the situation appears somewhat more optimistic so far. In the last quarter, Bank of America, known for its cautious lending, experienced a rise in credit issuance and a drop in delinquency rates. Meanwhile, JPMorgan and Chase reported less favorable yet still decent outcomes: their lending saw a minor decline, and although delinquency rates modestly rose over the past year, they remain at last year’s levels.

However, the banks’ future predictions are slightly more negative. Citigroup mentioned a potential “deterioration in the macroeconomic outlook” in its analyst remarks. On a brighter note, BofA referred to “a changing economy” that could impact its operations. Additionally, both Citi and JPMorgan are increasing their reserves to prepare for potential losses in consumer credit.

The most concerning sign we’ve encountered comes from the Fed. Recently, a historic number of households are only making the minimum payments on their credit cards (data provided by Torsten Slok at Apollo), indicating a serious downturn. Yet, it might be that, as with other credit quality indicators in recent years, this reflects issues mainly affecting lower-income households with high, fluctuating debts.

The economic situation is challenging to interpret right now. Economists and commentators like us have the luxury of waiting for clearer data. Unfortunately, investors are not in the same position.

(Reiter)

One interesting read

On pronatalism.

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