Recent weeks have made clear the economic headwinds facing the United States. The challenge is just as acute in the Euro area. With increasing pessimism for the future of consumption and inflation, the US economy seems to be heading down an inevitable path. At the same time, the Euro area has been releasing persistent inflation prints to the upside, adding jitters about the region’s economy.
In fact, recent analysis shows that US news has been heavily weighted towards reporting bad news, especially about anything happening economically. US core services inflation was quite strong, analysts pointed out, an increase that was exacerbated in part by the timing of the Easter holiday. This increase in service-related prices has made the narrative around inflation in our country even more confusing.
The Euro area saw a small increase in its inflation numbers. Not only did the region’s core inflation jump from 2.4% to 2.7% y-o-y, but it exceeded the consensus prediction of 2.5%. This latest move highlights the continued inflationary pressures affecting European economies, though at different rates of recovery among its member states.
Going forward, the US economy has already started to retrench and is expected to weaken even more in the months to come. Leading experts believe that the prevailing behavior of consumption frontloading will create an impossible payback period. Following an initial consumer surge, they now expect overall consumer spending to begin to contract. This expected retraction has led to worries about a long-term economic expansion and consumer outlook as inflationary forces return.
Additionally, geopolitical factors are influencing economic dynamics. The new de facto trade embargo between China and the US will only deepen the economic damage for both countries. With heightened volatility still continuing, experts have repeatedly cautioned that this extended war on trade could damage future growth potential and sour investment attitude.
Stock markets have been resilient beyond imagination. They were propelling themselves even further, stoked by better-than-expected earnings from large US tech firms. These positive earnings numbers have only added to the renewed shot of investor optimism that has led to a rally in share prices.
Make no mistake, the narrative around the trade war is shifting. US President Donald Trump has finally put to rest speculation he would fire Federal Reserve Chairman Jerome Powell. This announcement was more than enough to make US bond yields fall sharply. In fact, they dropped by 20 basis points immediately following his announcement. As a result, market observers have taken this to be a sign of stability in an otherwise unstable economic environment.
The recent GDP figures for Q1 indicate a negative print of -0.3% quarter-over-quarter annualized, raising alarms about underlying economic health. Despite the downturn, US consumer spending remained robust in March. This demonstrative dichotomy highlights the disparity behind our spending priorities versus the focus on growing our economy.