US economic growth has been and remains extraordinary. Both real (minus inflation) and nominal (including inflation) growth have consistently been at the high end or above Wall Street forecasts for several years now. Wall Street sees the momentum continuing. Earnings estimates for corporate America remain extremely bullish and bond markets are pricing in at least three more interest rate hikes from the Federal Reserve to combat inflation which is expected to persist. Our view is that conditions are building for a slowdown in both growth and inflation. This is not a recession call or a prediction of impending market doom. In fact, slower demand growth is likely to also mean less inflation pressure and fewer rate hikes from the Fed. My only point here is that there are a significant number of factors that are likely to weigh on growth. Of course, there are wild cards given I have no idea what will happen to oil and oil product prices and I have no idea how sentiment will evolve toward AI. But accepting that there are critical factors that are essentially unknowable, there are a slew of factors enumerated below that are more likely to indicate a slowdown than the continued breakneck pace of demand.
1. The lagged impact of higher rates. Rates, across the curve, have moved up significantly. That has meant higher mortgage rates and higher rates for the debt financed AI infrastructure buildout.
2. The Senior Loan Officer Opinion Survey (SLOOS) indicate slowing load demand. They are not only seeing slower mortgage and mortgage refinance demand, but we are seeing a modest slowdown in demand for commercial and industrial loans. Less demand for credit indicates less future demand. The one are where the Fed’s loan officer survey showed greater demand was in the credit card space which may indicate that American consumers in less affluent cohorts are falling further behind.
3. Housing activity is going from anemic to worse. New residential construction starts are slowing further from historically low levels Turnover is slowing and even remodel activity has slowed. We have not seen housing prices fall on a national level yet, but that certainly appears to be a growing risk, especially if there is further weakness in equity markets given the wealth effect has held the housing market up amid terrible affordability.
4. In the wake of an election result that was clearly influenced by voters not looking for more data centers in their local areas, it is likely that we see more regulatory burden slowing the construction of massive data centers in the early stages of planning.
5. Following the President’s victory in 2024, we saw a sharp move higher in business confidence from the National Federation of Independent Businesses (NFIB). It is reasonable to assume that the inverse could happen following an election where the incumbent party lost badly. Just like consumer confidence data has become more driven by politics, so has small business sentiment. Weaker small business sentiment means less hiring and less investment.
6. With the Democrats in control of the House and Senate and a Republican in the White House, there is little incentive for the Congressional majority to abide aggressive fiscal spending. The Democrats are incentivized to both show fiscal discipline while any resulting slowdown is likely to come at the political expense of the incumbent in the Executive Branch.
7. Health care costs are going to inflect higher as the ACA premiums are expected to rise by around 15% with the expiration of enhanced subsidies. Employer based premiums are also expected to rise substantially. The bottom half of US consumers are already struggling and rising healthcare obligations could exacerbate that reality,
8. Base effects matter. As analysts who cover retail companies like to say, “it’s tough to comp the comp”. In other words, when the recent history has been very strong, that tends to make the current comparisons more difficult. Going forward, the economic data is going to be compared against very high levels of growth and inflation. The outcome of tough comparisons are numbers that are likely to show less growth and less inflation.
So how would a growth and inflation slowdown manifest in markets? The most obvious answer is that there will likely be less Fed tightening than currently priced in and perhaps a bond market that firms up in the immediate future. Arguably less growth is bearish for earnings growth, while lower inflation and bond yields are bullish for discount rates and therefore higher equity multiples. We’ll see. Frankly all of this is background to AI sentiment which remains firmly in the drivers seat of the US economy and risk assets generally.
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