2 days ago
Look on my works, ye Mighty, and despair: US's economic outlook is decidedly murky
When I worked in fund management in the City of London in the 1990s, my team dreaded seeing one of our largest company investments featured on the cover of Business Week. Too often, it heralded bad news. So we formulated a curse: 'Those whom the Gods wish to destroy, they first put on the front cover of Business Week.'
This sentiment derives from the Latin warning, 'Those whom Jupiter wishes to destroy, he first deprives of reason.' It has been adapted many times since … including by James Bond! The variant that informed our 1990s curse came from Cyril Connolly, the journalist and critic: 'Whom the Gods wish to destroy, they first call promising.'
Fast-forward to 2024 and it seems as if The Economist has usurped Businessweek. On 19 October 2024, the British weekly ran a front cover story lauding the United States as 'The Envy of the World'. Eight months later, at least to many non-Americans, America is anything but.
Result? Many foreigners are selling their American financial assets.
Outsiders increasingly pity – not envy – the US because of the domestic political quagmire in which it is visibly trapped; its foreign policy challenges are no less daunting.
But I will leave the reader to decide for themselves whether they agree with these assessments. For my part, I focus mostly on the economics. Yet here too there are multiple signs of malaise. And they are not just cyclical – GDP growth was actually negative last quarter – but structural. Many titans of US finance fear this malaise could yet have world-altering consequences.
The subtext of The Economist cover story was to laud what especially financial markets had dubbed 'US exceptionalism': high economic growth, solid productivity gains, a generally strong dollar and, above all, a stock market that had consistently outperformed all-comers. The result of the latter was that the US – with but 4.2% of the world's population – accounted for 67% of end 2024's MSCI All World Equity Index.
The idea of American exceptionalism is far from new. It dates back to a 1630 speech from John Winthrop. Quoting the Bible – 'You are the light of the world. A town built on a hill cannot be hidden' – this Bostonian Puritan inaugurated a theme that has been oft repeated in US politics: one of American uniqueness, that, by being 'above', America would be a 'beacon of hope' for the world.
US politicians have repeatedly echoed this notion, most famously John F Kennedy in 1961: 'We must always consider that we shall be as a city upon a hill – the eyes of all people are upon us.'
In October 2024, The Economist was suggesting that this US beacon of hope had become 'The Envy of the Financial World'. How different everything seems now!
Part of the challenge faced by those of us in finance daring to suggest that 'something is amiss with the US' is that we face a form of colour blindness: dollar blindness.
Most financial analysts and investors – plus the talking heads of CNBC and Bloomberg – speak Dollar as their first language … and are rarely fluent in any other currency. And because they nearly always speak in dollars, they cannot appreciate how much the US dollar 'ain't what it used to be'.
Furthermore, by having strong equity biases, they often have only a vague grasp of the vagaries of bond and currency markets.
To most of the Dollar-fluent group, the fact the S&P 500 has hung in there since 18 October 2024 (and Donald Trump's election soon thereafter) means there is no cause for alarm: equities are broadly flat since that article.
Even if equities are not one of the vital signs flashing red, an increasing number of foreigners are now divesting their savings from US Treasuries and thereafter the US dollar. (To state the obvious, the currency unit of account for foreigners is not the US dollar.)
Over the past eight months, the UST 10-year yield has fallen from 4.08% to 4.28%. More significantly, over the same period, the 30-year – which saw outflows of $11-billion in Q2 25 – has fallen from 4.38% to 4.82%.
On top of these bond losses, many foreigners have lost money on the currency cross as the dollar's DXY Index has fallen from 105.5 to 98.0 over the past eight months. (The DXY actually rose to 110 until just before Joe Biden handed over to Trump, but has fallen 11% since that presidential inauguration).
Added to these red lights, we must note a recent slew of US macro data – both hard and soft – that is painting a worrying cyclical picture. The IMF forecasts that – after 2024's 2.8% – the US economy will grow a full percentage point less, at 1.8%, in 2025. In 2026, they see yet further deceleration in that growth rate.
This slowdown will be before the effects of the tariff war are fully reflected. In addition, there is a growing foreign tourist stayaway now all too evident in flight and hotel occupancies.
Finally, the loss of the growth drivers from immigration – which has driven all GDP growth post-Covid! – are also hard to estimate. Meanwhile, the 'all-important' US consumer is showing signs of stumbling: 'all important' as consumption accounts for nearly 70% of US GDP.
The Consumer Confidence Index dropped 5.4 points in June to 93.0 – significantly below the 98.4 consensus estimates. May's retail sales were down 0.9% month on month. May auto sales decelerated from March and April. Restaurant sales fell -1% in May after a gain of +2.5% in April. Housing data is cooling: May housing starts were down 9.3% to a five-year low and property prices are falling in real terms.
But, in the grander scheme of things, these monthly macro readings are but peripheral readings, cyclical more than structural. What matters above all – more precisely, underneath it all – is what lies beneath in the foundations of the US economy. For buried there is a ticking time bomb: the US Federal budget deficit.
And Moody's, by recently stripping the US of its last AAA sovereign debt rating, has alerted investors to the increased volume of that ticking.
For the first eight months of FY 2025 to end May, this deficit rose $1.37-trillion, up 13.5% on 2024's equivalent. After a $1.8-trillion deficit in FY 2024, a higher total for FY 2025 now looks possible … and this despite the cost-cutting efforts of the now-departed Elon Musk and his left-behind Doge team.
Trump's flagship budget – 'One Big Beautiful Bill Act' (OBBBA) – is criss-crossing multiple minefields in Congress. The Senate and House Republican versions –still not reconciled to each other – are underpinned by heroic assumptions, especially on the revenue side.
Both also rely upon a GDP growth rate rising over 4%, an eventuality few neutral forecasters find credible. The Tax Foundation forecasts the OBBBA will raise GDP by just 1.1%. Yale University even sees growth declining 3%!
The dysfunctionality of Congress is rooted in a seemingly irreconcilable desire for Republicans to cut taxes and for Democrats to raise expenditure. (The Republicans always want to raise defence expenditure too.)
If what results in the actual numbers in coming years is a mish-mash of lower revenues (suggesting tax cuts happened), yet similar or even higher expenditure (implying Republican cost cutting will have been mostly thwarted), then it is a mathematical inevitability that the primary deficit (which excludes interest on debt) of the Federal Budget will rise.
Yet there is wishful thinking on the part of most Republicans that the primary deficit can, looking forward over the next decade, be contained at around $500-billion annually.
However, if any overall deficit results, and not just a primary one, this means the overall total federal debt ($37-trillion end June 2025; forecast $37.5-trillion to end fiscal 2025) must rise too.
So to be clear, a primary deficit of '$500-billion' in 2025 (Ahem! It is heading for $1-trillion plus!) plus this year's debt interest bill of $800-billion would result in an overall deficit of $1.3-trillion … which would then be added to total outstanding federal debt.
The following year, interest on a larger federal debt (now forecast to be $37.5-trillion federal debt by the end of September 2025) would then be payable.
Not that the primary deficit can in any way be ignored, it is the interest bill on government debt that risks weighing down US government finances the most. Why? Because if Congress cannot run primary budget surpluses, influencing that interest bill is essentially beyond their reach.
And, to quote the Committee for a Responsible Federal Budget (4 June 2025): 'If interest rates were to remain elevated at current levels – with 10-year Treasuries at 4.5% – then interest costs would climb further to $2.1-trillion (5.1% of GDP) in 2034 or $2.2-trillion (5.2% of GDP) under a permanent OBBBA scenario.'
Uncontrollable interest payments could yet become the tail that wags the federal deficit dog.
One must add to this fiscal fiasco the cocktail of uncertainty now facing the US's longer-term economic growth prospects: higher tariffs, evidence of foreigners boycotting US goods (think Boeing, as recently as 2017 the US's top industrial exporter), macro policy uncertainty causing investments to be postponed, and increasing cuts to university-based R&D as part of a wider attack on academia, the legal profession, the fourth estate and above all the Constitution itself.
Far from being 'the Light on the Hill', the US's economic outlook is decidedly murky. Is it any wonder that foreign investors are shying away from the US bond market, precipitating rises in longer-term interest rates (so adding to the financing burden of federal debt) and thereafter causing the US dollar to sink?
The British historian Arnold Joseph Toynbee wrote that 'Civilisations die from suicide, not by murder'. And the mounting travails faced by today's US have mostly been self-inflicted.
What should we expect next? Georges Danton, the orator who became the minister of justice in 1792 three years after the French Revolution and president of the National Convention a year later, was credited (among others) to have predicted: 'Like Saturn, the revolution devours its children.' Madame la Guillotine made Danton's acquaintance in 1794.
Will Donald Trump start turning on his own? Was Elon Musk his amuse-bouche? Will Tulsi Gabbard be the next course? How will Trump serve the Maga wing of the Republican Party as they decry his 'foreign adventures'? Or Thomas Massie? And will Baked Alaska – Lisa Murkowski – yet be Trump's dessert?
'The New Colossus' is a sonnet by Emma Lazarus written in 1883 to raise money for the construction of the Statue of Liberty's pedestal. It is engraved on a bronze plaque inside that pedestal. Its most famous lines are:
Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!
This welcome does not apply in 2025. What then does the future hold for an America that is no longer a Statue of Liberty lifting a lamp beside a golden door?
In the first version of the film The Planet of the Apes, the closing image is of a partially buried Statue of Liberty rising rusted from a deserted beach. The film's lead, played by Charlton Heston, realises the gruelling odyssey he has just survived has all been in vain: he was always back on Planet Earth.
This powerful scene surely echoed Shelley's 1818 sonnet, Ozymandias:
Poetry for thought. DM
