Shifting macro risks

The big economic story of the past two months has related to concerns about heightened risk of US recession.  US markets sold off heavily on economic concerns in August; and after recovering their losses, have dropped again over the past week: soft manufacturing PMI data was a catalyst, along with weakening labour market data.  The US economy is clearly slowing, and the Fed will begin to cut policy rates at its September meeting. 

However, my assessment is that US recession risk is overplayed.  The labour market data are not terrible; and other indicators, notably consumer spending, are in decent shape.  Households and firms will benefit from lower interest rates; fiscal policy will remain expansionary; capex will become an increasingly important growth driver (the ‘great reindustrialisation’); and US labour productivity data are robust. 

The political risk profile in the US has also reduced over the past several weeks, as the likelihood of a Trump victory has reduced: VP Harris is ahead in several (not all) nationwide polls, and more significantly has made gains in key states. The race is closer than in July.  Tuesday’s election debate will be another key moment.

Unlike the experience of his first term, a victory for Mr Trump would likely weigh on the US economic outlook. Mr Trump’s combination of sweeping tariffs, constrained immigration, threats to Fed independence, and general unpredictability create economic risks that do not exist to the same extent under a prospective Harris Administration (particularly when constrained by a divided Congress, as is likely). 

Across the Atlantic, Europe’s economy continues to grind sideways (eurozone GDP growth of 0.6% in the year to Q2), dragged down by large economies (notably France and Germany).  Tight macro policy, higher energy prices, competitive pressures, and the absence of structural reform are weighing on the European economy.  Changes to macro policy and structural reform are needed: watch for Mr Draghi’s report on European competitiveness, to be released on Monday.    

The full note is available at: https://davidskilling.substack.com/p/shifting-macro-risks