US Recession Forecast by Atlanta Fed

Trades in Soda and Whisky;

The events over the weekend were quite something. The spat in the Oval Office has brought Europe together, with the UK at the forefront. While I would be an outright critic of Labour’s economic policy, Starmer has certainly stepped up as a leader in this crisis, backed up by the King. Tariffs and uncertainty help no one, least of all financial markets, and the only winner is gold. I will not attempt to analyse the political implications, as plenty of others are doing that more capably than I ever could. I will stick to the implications for financial markets.

This mayhem is happening at an interesting time in markets. The global divergence between the US and the rest of the world equities is unprecedented. That US “exceptionalism” began after the 2008 financial crisis and was principally driven by the technology sector and, more recently, unusually high government spending. Something has changed, and with the help of a falling dollar, the Great Rotation is underway.

The Atlanta Fed calculated a GDP forecast for the US called GDPNow. In their own words:

“GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.”

It was created in 2010, after the financial crisis, and has been pretty accurate in estimating economic growth, albeit with some noise. The latest reading is quite a shock. It was +2.9% in January, -1.5% in February, and -2.8% today. The Atlanta Fed’s model is telling us that the US economy is headed for recession.

Atlanta Fed GDP NOW and GDP

One game changer is DOGE, which is aggressively cutting government spending. I have read that average incomes in Washinton DC are among the highest in the USA, but now there are layoffs, and local house prices are already down 12% this year. This recession is government-induced, with the thinking to get it done early and be ready for a boom ahead of the next election.

Although some parts of the economy have done well, the consumer hasn’t benefited from the post-pandemic recovery. Higher interest rates have squeezed household budgets, and consumer confidence is weak and falling. A shrinking government and a weak consumer are not a good thing for stockmarkets.

US Consumer Confidence

Economic surprises reflect whether the economic data is getting better or worse. Remarkably, in both the UK and Europe, recent data show things are improving while the US is turning down. This is a far cry from the status quo of recent years.

Economic Surprises

Remarkably, UK and European stocks have been doing well, while the US and the emerging markets have turned down. Much of Europe’s good performance has come from banks as interest rates have held firm. In the US, the banks have already recovered long ago, and US weakness has been expected, as the stockmarket has long been overcooked. Yet emerging markets are another negative surprise. I had expected them to be at the forefront of the great rotation, but they are not, and I need to address that.

Major Stockmarkets – Past Year Total Return (inc. dividends)