Where Will Growth Come From?

Good Morning Ladies and Gentlemen

”Don’t criticise what you can’t understand.”

Bob Dylan

In my previous weekly update, I discussed the possibility of stagflation in the U.S., and I received a few messages asking how considerable that risk was. Obviously, I do not know, and usually, stagflation is rare. However, household consumption and government investment have been the primary drivers of economic growth over the past few years. Currently, the U.S. economy is not growing anymore, while inflation is sticky, and tariffs usually do not help bring inflation down. To stay cool with Mr. Bob Dylan, I do not want to criticise what I do not understand, but looking at what is happening in the U.S. right now, the reasoning behind a potential slowdown in both sectors (see below) with sticky or higher inflation seems quite compelling to me.

Last Week’s GDPNow

The nowcast for the first quarter of 2025, provided by the Atlanta Fed’s GDPNow, indicates a projected real growth rate of -1.5 %. This marks a significant decline from the previous week’s estimate of +2.3 %; a shift of such magnitude is rare. Even if some of this downturn can be alleviated in the coming weeks, it nevertheless signals a clear step toward a slowdown in the US economy. Recent US retail sales figures have been disappointing, and exports have also shown weakness. Additionally, applications for US unemployment benefits have risen to 240’000, suggesting that consumers are losing momentum. These trends are concerning because consumption constitutes approximately two-thirds of the U.S. GDP.

Surprisingly

The U.S. economy is facing a setback at a critical moment for President Trump, who aims to deliver on his political and economic promises following a period of robust growth and declining inflation under the previous administration right after the difficulties of the COVID-19 pandemic. Should weak growth persist into the coming months, market participants and media discussions will likely center on slowing or negative growth. In such scenarios, a U.S. President typically encounters significant challenges. Consumer sentiment in the U.S. is already declining, which is likely to adversely affect the President’s approval ratings in the medium term. The economy performed exceptionally well during the previous administration, leading many in the market to underestimate the possibility of a slowdown.

What Are Market Participants Afraid Of?

Well, Ladies and Gentlemen, market participants are concerned that the tariffs set to take effect whenever, including an increase in the China tariff from 10% to 20%, a 25% tariff on goods from Mexico and Canada, and an unspecified 25% tariff an-nouncement for Europe, will have a recessionary impact, coupled with inflationary pressures on the products subject to these tariffs and retaliatory measures. This situation arises when GDPNow indicates a significant downturn, driven by weak U.S. exports and sluggish consumer spending. There are growing indications that the first quarter of 2025 may see negative growth.

Conclusion

Diminished consumer confidence, heightened inflation expectations, sluggish consumer spending, increasing initial jobless claims in the U.S., reduced incoming orders in the manufacturing sector, and the U.S. stock market’s preference for defensive sectors all suggest a troubling trend. Like the Trump administration, those who disrupt the delicate balance of the ‘Goldilocks’ economy through significant intervention should not be surprised by a negative shift in the business investment cycle. If you were a business owner, would you invest in personnel, facilities, machinery, or IT at this moment, given the uncertainty about where this journey will lead? There is considerable ambiguity surrounding redundancies, tariffs, global alliances, and more, which could impact investments, job growth, and consumer spending. Therefore, the question remains: Where is growth expected to originate from?

Mr. Bob Dylan Once More

But then again, to stay cool with Mr. Bob Dylan, I do not want to criticise what I (maybe) do not understand.

Ladies and Gentlemen

As always, please share your opinion with me. Feel free to send your messages to smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li