Recently, there have been market tremors about a slowdown in the US economy. It began with the GDPNow indicator from the Atlanta Fed pointing to negative growth in Q1, largely due to a declining trade balance ahead of new tariffs. This is no longer seen as an isolated event: the US ISM also decreased, with new orders dropping below 50 after six months of growth. This was also likely impacted by the ongoing trade war.
The key question is: Is the US economy about to slow down? It seems likely, but the extent of the slowdown is still uncertain. This issue of Simply put explores this quandary by examining the reasons behind exceptional US expansion in recent years.
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Why hasn’t the US economy slowed sooner?
One of the puzzles in recent years is why the US economy hasn't slowed down more despite higher interest rates, both long and short. This raises the subject of whether monetary policy is no longer effective.
There is a case to be made here: growth has remained at least as high as it was from 2015 to 2019, despite interest rates being 3 to 4% higher, depending on the tenors and time periods considered. Figure 1 helps answer this question by examining the decomposition of US growth between components that are sensitive to interest rates (like durable goods orders, capital expenditure or residential investment) and those that are less sensitive or immune (such as non-durable goods consumption, state and federal government spending, and service consumption). This analysis partly explains the puzzle:
- From 1990 to 2015, the chart shows that the light brown, representing growth drivers sensitive to interest rates, dominated over the dark brown
- As the Federal Reserve began to hike rates in 2016, the dark brown area, representing less sensitive components, started to grow and eventually became the dominant component of growth. According to the Q4 GDP report, 100% of GDP growth came from rate-immune components and 0% from rate-sensitive components.
With higher rates, the light brown zone has receded, which is consistent with effective monetary policy. The lack of a slowdown simply reflects the dominance of growth components that barely respond to rate changes, among which service consumption is predominant, accounting for 60% of the growth in Q4 2024.
This raises a new question: can service consumption continue to be this robust?
FIG 1. Decomposition of US growth between rate-sensitive and rate-immune components1
It’s about consumption and investment yielding ground
For the US, our growth nowcasting signals peaked on 2 February 2025 and have deteriorated since. It's important to note that this isn't catastrophic – 41% of US data still shows improvement. The data that's worsening primarily relates to consumption: it is beginning to falter under the pressure of interest rates, while investment is reacting to current uncertainty. Production expectations held up until recently, but a decline is now evident in the ISM, indicating a deteriorating environment for economic decision-making. In essence, the US is experiencing a slowdown, something central bank watchers have been anticipating.
Read also: Will US market concentration fade in 2025?
Figure 2 conveys a clear message:
- From December 2023 to December 2024, the US macroeconomic situation improved as monetary conditions eased, leading to better consumption and employment outcomes
- Since the start of the year, amid high interest rates and likely influenced by the uncertainty of the ongoing trade war, our signals for both consumption and investment (including capital expenditure and residential investment) have begun to decline.
For now, these two elements are predominantly sensitive to interest rates, which implies that the less rate-sensitive components, illustrated by the dark brown zone in Figure 1, might not decrease significantly. However, our analysis does not distinguish between service consumption versus goods consumption. While the former appears immune to rate changes, the latter is not. A slowdown in the service industry would suggest that the current US slowdown is indeed substantial.
FIG 2. Decomposition of our growth nowcasting signal2
What this means for All Roads
As mentioned repeatedly since the beginning of the year, our All Roads suite of funds currently showcases a highly diversified mix of cyclical risk premia and hedges, which aligns well with this environment of heightened uncertainty. Our current market exposure in the Balanced Fund is positioned at a slightly lower level, around 140% for now3. This year has been favourable to multi-asset investors, with most risk premia generating positive returns4, thus rewarding diversification. It remains to be seen if this trend can continue in the current context.
Simply put, a weaker growth period in the US is likely, but right now this setback appears limited.
To learn more about our All Roads multi-asset strategy, click here. Macro/nowcasting corner
The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises is designed to track the recent progression of macroeconomic factors driving the markets.
Our nowcasting indicators currently show:
- Our growth indicator continues to decline, particularly in the US due to deteriorating consumption data. The situation is different in the eurozone and China, where the indicator has increased.
- Our inflation indicator remains globally stable, being ‘high but declining’.
- Our global monetary policy indicator has declined, primarily due to the recent decrease in price data in the US.
World growth nowcaster: long-term (left) and recent evolution (right)
World inflation nowcaster: long-term (left) and recent evolution (right)
World monetary policy nowcaster: long-term (left) and recent evolution (right)
Reading note: LOIM’s nowcasting indicator gathers economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).
