MacroKid: my macro blog

Tag: US

2026 predictions (and 2025 review)
First, 2025 review. Recession didn’t happen. At least when you look at financial markets. And ignore unemployed. Common theme by the end of the year formed as: “there’s not enough exuberance about AI“. More detailed view below. And yes, risk of US recession is still high.
1. US economy. Tariffs. The risk of tariffs GDP drag is skewed to the downside due to the Supreme Court decision as well as poor Republicans pre-election odds. And of course Trump’s $2,000 rebate proposal. Nevertheless, status quo tariffs impact on GDP is offsetting the frontloaded stimulus that is kicking in soon.
Housing market. Inventory of available housing is rising. Homebuilders earnings expectations are collapsing, dragging down their share prices. Housing will remain in oversupply in 2026 and prices will be softening.

Business capex. AI spending proved to be much stronger than expected despite rising AI competition. Competition is increasing from Chinese models or the rise of alternative compute methods. Scale, rather than optimization/research/monetization is the main AI driver now. The part that can be sold easier.

$Chinese AI leaders are spending fractions on capex compared to US companies$

Actual data centers spend is spreading beyond just tech companies. Commercial building construction index year ago and now. What seemed as a slowdown, was just a pause. As building a data center seems to be an easy business pitch.

Meanwhile, real median US manufacturing is contracting. Number of industries with output rising more than 3% pear year is near recession levels. AI revolution is concentrated in a few sectors at the moment. Unlike previously stronger manufacturing periods like tax cuts (2018), shale (2014), housing (2005)or internet (1999). Interestingly, tariffs so far had minimal impact on domestic output.

Capex expectations are also significantly different between AI and the rest. Outside of the hyperscalers, companies aren’t planning to increase (nominal!) capex in this cycle.

ISM business backlog is depressed, book-to-bill ratio is at recessionary levels. Manufacturing recession keeps rolling across the sectors.

Also, AI capex starts to be perceived as a drawback, judging by Oracle share price and CDS spread, or by reaction to capacity cancellations. Risk of lower than expected AI capex is rising.

Unemployment. It’s rising as expected and will increase in 2026. Number of people without a job is growing – either in or outside of the labor force. Weak housing market and capex won’t help next year.

Small companies continue to see weak sales ahead, while consumers fell poor labor conditions. That’s usually a sign of higher unemployment.

Wealth effect. Probably that’s the core reason of stronger than expected consumption in the US. The spread between consumers unemployment expectations and stock market expectations is the largest ever. Everyone has to be invested in (AI) stocks and hope your job isn’t cut. Wealth effect will decline due to weaker equity and housing markets next year, probably.

2. Global inflation declines. This proved to be correct. But it’s mostly visible in EMs, rather than DMs, where inflation is higher. Tariffs were deflationary for the world. Effect of strong wages in developed markets is more pronounced than in EMs, after decades of relatively low wage growth.

At the moment, DM wages are slowing down, led by the USA. Japan is still experiencing inflation problem, but wages there have rolled over already. Next year inflation will be lower again.

3. China economy performs better than expected. China GDP growth expectations are in fact rising while housing market is still deteriorating.

Stock market has also rallied, but of course not that great as Kospi or even Ibex.

But the next year is going to be more challenging as lending is deteriorating going into 2026, unlike 2025. Strategic sectors, like chips, electrical equipment and renewables should outperform next year.

4. Higher number of defaults didn’t translate into higher credit spreads. In fact, actual number of defaults is making new highs every quarter. That’s in line with weaker small business sales expectations and consumers job fears. Spreads will have to crack in the end, either public or through private credit channels.

Consumer delinquencies are deteriorating as well. Credit short has been a poor recommendation. It was relatively more resilient during the liberation day sell off too.

5. Performance. Overall, recommendations performance was unsatisfactory. HSI outperformed S&P, but S&P is still up 18%. Liberation day ended up better than feared for the stock market, but didn’t help the economy. Long term treasuries returned only 4% in 2025 with significant volatility. Other DM bonds performed even worse. Front end of the treasury curve was a good trade, but it was offset by strong corporate credit performance.

6. 2026 predictions. Inflation won’t be a problem. Jobs – will. Unemployment should rise and consumption decline. And S&P should be down on a year, as AI will disappoint. Global growth is about to peak as well. In that case the risk of another fiscal package is increasing.

In this scenario front end rates DM will continue to rally. JPY and JGBs will rally too, as inflation declines and domestic players start to hedge currency again.

Happy New Year.
December 23, 2025
Recession in the US

US is in a recession, based on the last 2 employment reports and labor benchmark revisions. Most probably NFP was negative during several months in 2024 already. And it’s hardly positive right now. Asset prices, AI capex, and consumers willingness to reduce savings rate maintained aggregate growth of the economy. If current labor weakness spirals, there’s a problem.

There were some extreme statistics recently pointing out to very weak labor market. The 1-month drop in private employment relative to labor force (70bp) is consistent with prior recessions. That’s Sahm Rule triggered in just 1 month.

Flows of unemployed people out of labor force are accelerating. Finding a job is getting harder. And people give up faster.

Household employment sentiment is seriously depressed as a result. Such level was historically associated with large job cuts arriving soon after.

Not surprisingly, corporations are signaling faster reduction in employment as well.

And of course job creation revisions were significant second year in a row – another recessionary indicator.

Given current 6-month rate of NFP growth, job losses usually accelerate and precede all previous recessions. 2010 was a false positive, when job market bottomed after similarly weak prints. When NFP growth slows to 0.05% over the last 6 months (as it is at the moment), average forward 6 months growth is -0.12%. I.e. NFP turns negative, layoffs are rising. That’s equivalent to 1-1.2mn of expected job losses over the next 6 months.

But is the cycle going to improve from here? Even though ISM orders were better in August, backlogs are still deteriorating and inventories are rising. Usually all three ISM components are synchronized.

And when they diverge, that’s a bad sign for the economy, or the cycle direction at least. Orders aren’t translated into sustainably stronger backlogs at the moment. But companies are accumulating inventories in anticipation of better demand (and tariffs front running). What if orders stay low and inventories have to be sold out?

And what about inflation? It’s losing more steam, according to US small businesses. Tariffs impact has been marginal so far.

September 11, 2025
First shocking NFP print in a while: US equities mask growing risks

Inflation continues to miss expectations and labor market apparently has been weak since April, judging by the large NFP revisions. Tariffs prove to be a catalyst for a slowdown in US economy, but not in US (AI) stocks yet.

US companies report relatively healthy earnings, as dollar weakens and US avoids retaliatory export tariffs.

Exporters are leading the latest upward leg in US stocks. US Tech will probably avoid additional foreign taxes as well – as a part of the same deal.

US Tech continues to expand AI capex, while the rest of the S&P 500 index is reducing capex growth to almost 0. Compositionally that’s not great for the labor market going forward, since big tech basically stopped hiring after Covid, but other business didn’t.

At the same time US economic data continues to surprise negatively on aggregate. Growth, labor, inflation – weaker than expected.

All three parts of the economy continue to slowdown. Labor is contracting now.

Absolute number of NFP jobs created as well as jobs breadth has deteriorated substantially – now also worse than in summer 2024 and in line with recessions.

Unemployment, including people who are not in the labor force but want a job, is rising at the similar trend as in the last couple of years. Albeit slower than in 2000 and 2008, as layoffs are still low. AI hasn’t altered the trajectory yet.

US personal consumption slowed down substantially this year as well. Household are saving more, as labor market uncertainty is rising. And number of jobs is declining.

There are signs of AI cycle slowing down from here too, despite ever rising capex plans. While Taiwanese orders and exports are booming, soft leading indicators are souring.

Central bank easing options continue to look attractive. Long term yield found some resistance, making duration more favorable. DM equities are facing downside risks, as export economies will suffer from the “trade deals”, and in US consumer is losing steam.

August 5, 2025
US economic weakness spreading into consumers

US consumer activity is rolling over, following the first layoffs and poor stock market performance. Employment has deteriorated and is expected to increase further. And policy put might be lower than what people wished for. FED might be forced to stay too restrictive given unfavorable core CPI and PPI mixes.

Slowdown in discretionary retail spending is significant. Current decline in real restaurants spending is getting similar to the GFC levels (ex Covid shutdowns).

On an aggregate retail sales basis, seasonal adjustment factors were very beneficial this February.

Soft consumer labor sentiment is collapsing. This could be exaggerated by strong political bias of the surveys. But even this uncertainty will curtail private activity plans too.

And already now the actual number of people who want a job jumped to a new cycle high in February.

Labor demand continues to soften, as job ads are falling to new lows.

And number of layoff mentions remain elevated.

Services CPI, that was supposed to remain sticky, is moving towards pre-Covid ranges. Despite that, PCE inflation composition is expected to accelerate and force FED to be more hawkish in March, while economy and inflation are both slowing.

Overall, economic weakness is spreading into consumers and there’s potentially more to come.

March 17, 2025
US economic momentum softens, new data rolls off quickly

Newly released economic data out of US is rolling over quickly. At first glance, Trump tariff policy and Doge employment actions are raising uncertainty and reducing activity. In fact, economy has already been showing topping signs for a while. Lack of layoffs and aggregate corporate earnings were key pillars of the current cycle. But this might be unwinding at the moment.

Corporate earnings are now facing downside risks, according to S&P.

As service companies aren’t able to raise prices anymore.

Diffusion of earnings-per-share expectations has been deteriorating. More S&P sectors are expected to have declining earnings over the next 12 months. This can trigger a sell off in equities.

Largecap AI story is not only shaken by the Deepseek news, but by new potential reversal in activity: “Microsoft Corp. has canceled some leases for US data center capacity, according to TD Cowen, raising broader concerns over whether it’s securing more AI computing capacity than it needs in the long term.” Now both small caps and the Magnificent 7 are underperforming the broader market.

Consumer is showing more weakness signs. Weak retail sales were accompanied by poor Walmart guidance. Conference board consumer confidence is flashing red unemployment signs.

Number of “layoffs” mentions in the news articles is spiking again.

Bottom line: economy is weakening, unemployment can start rising again, bonds remain more attractive than stocks.

February 25, 2025
US employment market continues to soften

A lot of labor market stuff has been revised since the last post. Most importantly the household survey employment was raised by 2.2 million, the same as the labor force, meaning CPS under counted number of people employed substantially in 2024. Adjusted for the population control, BLS says unemployment rate would have been lower by 20 basis points and a number of people unemployed would decline by 142k.

The population control effect implies unaccounted workers sample has only marginally higher unemployment rate than entire population, which can be too optimistic. In fact, recent immigrants have much higher (around 10%) and faster rising unemployment rate than local population, according to St Louis Fed.

At the same time, flows into employment stay weak for people who are out of the labor force.

Unemployed people are more likely to leave the labor force as well. The trend has been consistent with rising unemployment rate in the past, with an exception of the 1993-1995 period.

Moving to establishment survey details, private NFP less healthcare increased by 45k in January. Retail employment again was unusually strong, and didn’t reverse as expected, adding 34k of jobs. But tariffs front running is still probably the main driver of the growth.

Moreover, while retail NFP was strong, working hours in retail dropped to the previous all time low. Aggregate working hours are trending down too. And the sector employment should be converging lower in the future.

Overall NFP employment breadth deteriorated in January, with all categories but manufacturing posting worse month-over-month growth. November-December bounce could still be related to post-election hiring backlogs.

Federal spending freeze is already having an effect on contractors. Unemployment claims will have to start rising again. Some signs are visible in the Google Trends data already.

Small businesses continue to cut labor demand. All in all things are setting up for a bottom in the unemployment rate.

February 11, 2025
Stronger US labor numbers in December, but risks skewed to the downside

US labor market momentum improved strongly in December after higher than expected non-farm payrolls and lower unemployment. Retail trade seasonal increase in employment was registered in December due to the calendar effects. And firms probably cleared hiring backlogs after the election results. Both will be a drag in the next reports.

Is labor market reversing and accelerating again? Doubtfully. Many labor indicators are mixed. Some, which are mostly based on corporate expectations, are improving. Others, more actual, are stable or weaker. Unemployment run rate is around 4.5% at the moment, based on various regressions. Risks of the higher unemployment rate remain.

To begin, actual flow of people not in labor force to employment is declining further. But people remain employed longer compared to previous labor softening cycles, judging by employed-to-employed flows.

Household survey registered a strong increase in private employment in December: +500k of private non agriculture jobs. Nonetheless, full time employment has barely moved. Household survey is further diverging from NFP.

Both NFP and household surveys was also significantly affected by retail sales jobs. NFP retail trade category increased by 49k m/m. Household survey “sales and related” jumped by more than 500k on a seasonally adjusted basis. Some of that could be given back in the next reports.

Moving to alternative indicators, University of Michigan consumer expectations of 1-year unemployment deteriorated significantly in January. Current level, especially its 6-month moving average, isn’t always indicative of recessions, but it’s also much worse than in January 2017, the first Trump’s January.

While NFIB small businesses hiring plans jump, similarly to other NFIB expectations sub-components. This is similar to the first Trump term as well.

Hiring expectations are also stronger in a number of other regional Fed surveys.

But actual change in employment per firm, according to NFIB, is down to a new cycle low.

And a lower number of firms is raising wages now, which usually happens in a weaker labor market, with unemployment closer to 4.5% (based on a simple regression with pre-Covid sample).

We’ll see whether expectations will affect current behavior, or just mislead about the reacceleration narrative. Risks of higher unemployment rate stay high.

January 14, 2025
2025 predictions: US equities and yields down, China outperforms, credit risk jumps
1. Risk of US recession is increasing: tariffs reduce aggregate demand, housing market is deflating, business capex set to decline after IRA and AI boost, personal consumption will slowdown due to higher unemployment rate and weaker wealth effect, fiscal impulse disappears. S&P and risk assets fall, but not because of higher rates. As Fed turns dovish, 2 year yields rally.
Tariffs. US GDP will drop due to higher costs and lower demand, offset by corporate tax cuts, and prices inside the US will jump again. But it will help with deflation outside of the US.

Estimates of GDP decline vary across economists, but conclusion is similar. US will require substantial fiscal stimulus to diminish negative effect from tariffs.

Moreover, the first round of tariffs had negative cumulative effect on US employment mostly due to rising import costs and foreign retaliation, according to Fed.

Housing market. Number of houses for sale is rising quickly at moment, even when normalized by actual number of new homes sold. This kind of inventory accumulation was associated with prior recessions and falls in general employment.

As a result deflation in housing is spreading. Implications for general inflation are also negative.

Business capex. Nonresidential construction planning (AI data centers, offices, warehouses, retail etc) is slowing down.

US trucking remains in recession, as commercial capex ex AI has been slowing down since early 2023.

US manufacturing capacity is growing at 1.5% yoy, the fastest pace since 2012. Electronics (including semis) capacity is growing at much faster 6.3% yoy. But overall manufacturing output is down 1% yoy and has been lagging capacity expansion for 2 years now.

The lack of manufacturing output growth leads to declines in capacity utilization and higher unemployment historically. This is usually followed by long business capex slowdowns.

Unemployment. Employment intention proxies remain weak. At the moment there’s no boost expected from any of the Trump policies, according to soft indicators.

Consumer and small businesses surveys are consistent with unemployment of around 4.5-4.6% at the moment.

Private employment lost 1.3mn of jobs in the last year and a half, according to household survey. Total private household employment is up 4.4mn in the last 3 years. That compares to 10mn of private and public jobs added, according to NFP survey.

Wealth effect. S&P returned roughly 26% in 2024, one of the largest amounts in the last 30 years. Average S&P return during this period was 8.5%.

At the same time, trailing 12 months EPS is up 7.7% this year, marginally above average 7.3%.

The index jumped 55% over the last 2 years – one of the best runs ever. That unsurprisingly entrenched into most recent consumer expectations and boosted actual net worth.

US households net worth is rising at around 12% yoy at the moment. This is roughly in line with an average of S&P returns and new home prices. While housing is already peaking and prices are declining, stock market (and Bitcoin) is maintaining strong wealth effect for households. Unfortunately, the current ramp up in net worth is not driven by owning companies, that generate excess business returns but to a large extent is a result of equity multiples expansion.

Fiscal impulse. Economists expects US budget deficit to remain at 6.5% over 2024-2026, and government debt to add 4.5% of GDP during the period. Fiscal impulse will again recede to zero in this scenario after roughly $1.2tn of incremental impulse since 2022.

US GDP significantly decelerated in 2022 in line with tighter fiscal policy. But later reaccelerated again. Excluding some idiosyncratic contributions like Ozempic, or Boeing output fluctuations, or defense contracts, US GDP is already slowing from 2023 average pace.
1. Global inflation declines. Absent of another forced closure of global manufacturing, 8% of GDP new fiscal impulse (both hardly possible), and (most importantly) energy shocks, inflation is set to decline further from here. Long term bond yields fall globally.
Inflation is closely linked to energy prices and usually moves in the same direction: shocks in 2008, 2014 and 2022 – are all interconnected, not just in the US, but globally too.

And oil/natural gas prices are not just part of headline CPI, but are important contributors to non-energy services ex-shelter CPI too. Energy plays a key role in services like transportation (air tickets), recreation (restaurants, beauty saloons), accommodation (hotels or short term rentals). In a scenario when oil prices stays the same for the next 3 years at $70/bbl, services CPI should be trending down. Unless oil jumps back above $100, the risk of the second wave of inflation is minimal.

US wages, another potential source of inflation, are slowing down further, but are still above pre-Covid averages. However, US economy remains in the extended cycle top, and labor market will continue to soften.
1. Chinese economy is starting to pick up and perform better than expected, as consumer confidence rebuilds, economic stimulus spreads. China remains strong in car manufacturing, semiconductors, AI, energy technologies. Equities perform well next year.
Property sales in tier 1 cities are rising.

While supply of built properties is declining.

Aggregate weekly house values stopped declining.

Corporate earnings are improving. HSI trailing 12m EPS is up 8% year-to-date.

Equity market performance was also very strong compared to the last 10 years.

Net portfolio flows out of China have been negative since the end of 2021. Similarly China market cap to GDP peaked during the same period. It now stands at around 55%, compared to 110% of global market cap to GDP ratio. China is significantly underowned, while government is prepared to stimulate internal demand and the main source of deflation, property market, is showing signs of bottoming.
1. Defaults will get too costly to ignore: credit risk will jump.
Defaults are rising in various parts of the world and asset classes, while credit risk premium remains too complacent. Leveraged loans defaults and distressed exchanged are rising towards four year highs, as rates stay restrictive. And despite looser credit standards.

US commercial real estate delinquencies are rising

Number of Chapter 11 filings is rising too

US Credit Managers survey is consistent with much wider credit spreads.

US consumers are also experiencing unusually delinquencies rates, despite still healthy labor market and very strong equities.

Let’s review next December.

Happy New Year!
December 27, 2024
Yes, but: US bifurcation is everywhere

What are common characteristics of current US economy and the financial market in general? On the surface, yes, things are great, but constituents can look very weak.

S&P is making a new high every day? Yes, but breadth is worrying. Current negative breadth was associated with a major top during the dot com bubble or is usually a sign of market capitulation.

Now it’s becoming almost shameful to mention how expensive the stock market is. But divergence between US market capitalization to GDP and US contribution to global GDP is rising.

Corporate margins are record high? Yes for some, but not for smaller businesses:

Russell 2000 is also significantly underperforming S&P this year, especially compared to 2016, the first Trump election. Incremental policy benefit will be much smaller relative to the past.

NFP is rising to a new high every month? Yes, but according to household survey private employment declined by 1.3 million since the middle of 2023:

Number of people not on temporary layoff is accelerating.

Credit spread are making new lows? Yes, but number of bankruptcies is above pre-Covid level:

Small businesses are paying around 9% interest on their short term credit, while sales and earnings diffusion has collapsed.

Number of businesses losing money is rising:

The focus on aggregates disguises the fact that much of corporate America is in very poor shape. pic.twitter.com/0SSgKh7p2K

— Peter Berezin (@PeterBerezinBCA) December 13, 2024

https://platform.twitter.com/widgets.js

Expectations about Trump policy are super optimistic? Yes, but there’s still no pick up in current activity. Small businesses optimist jumped, same as in 2016. However, actual sales with prices (nominal GDP proxy) are declining this time.

Combined manufacturing and services ISM new orders, backlog and output – all declined in November.

Commercial buildings construction leading index is also falling – capex cycle is turning lower.

Yes, US perceived exceptionalism is here, but equities are becoming very risky and bonds stay attractive just before consensus is pushing FED to take a pause.

December 13, 2024