07 Nov 2023 3 min read

The beginning of the end for the unstoppable US economy?

By Willem Klijnstra

On the face of it, the latest round of US economic data points to continued strength. But we believe the cracks are finally starting to show.


In recent months, Europe has tracked relatively well against our forecasts, with recent stagnation on course to morph gradually into recession, as tighter financial conditions combine with signs that labour markets are weakening.

In contrast, the US has confounded our recession expectations, proving remarkably resilient in the face of higher rates.

In this blog post, we explain why we believe the latest figures on US growth and employment indicate that the cracks are finally starting to show in the US, and why we’re going against the grain by preferring European equities.  

All is not as it seems

US GDP in the third quarter was strong, even if 4.9% growth exaggerates the underlying strength. With hindsight, we attribute much of the positive growth surprise in 2023 to an unexpectedly strong fiscal contribution.

This reflects a combination of a shockingly large widening of the budget deficit in 2023 to 7.5% of GDP versus less than 4% in 2022 (when adjusting for the accounting of student loans);1 strong spending and hiring from state and local governments; and tax incentives and legislation, which have led to a jump in manufacturing construction.

Economists continue to debate the role of excess saving in driving growth; the latest vintage of data suggests excess saving is taking longer to be exhausted than previously thought. However, recent consumption growth has been driven by a further rundown in the savings rate rather than real disposable income growth. Without continued strong employment growth, the consumer looks vulnerable, which makes the jobs report released on 3 November 2023 a potential turning point.

The squeeze is on

The details of the October employment report were considerably weaker than the 150,000 headline job growth number, which was concentrated in a couple of sectors alongside downward revisions to the previous two months. Hours worked declined and unemployment rose, despite a modest fall in labour participation.

Combined with lacklustre survey data, this points to an economy slowing.

At this stage, it could all still be consistent with a ‘soft landing’. However, we think expansionary fiscal policy has masked a squeeze on the economy from higher rates and tighter bank lending standards, which has already driven a sharp slowdown in credit growth. Fiscal policy is set to turn much more restrictive in the months ahead, while the lagging impact from monetary tightening is still filtering through. The difficulty facing the Federal Reserve and other central banks is that inflation is likely to remain sticky in the early phase of the downturn.

By the time inflation appears to be heading back to target, it may be too late to prevent recession.

Our view on European equities

Shorting Europe remains popular, despite valuations being much more attractive than in the US. We assess investor sentiment though many lenses and Europe shows as particularly unloved. This week one of the major global banks published its 2024 equity outlook. The bank is underweight Europe and overweight the US – another sign of the scepticism towards European stocks. We’re currently leaning against that scepticism, with a long in euro area equities relative to the US.

Sector composition is a big factor, but we still see that difference in valuations when we adjust for sectors. Acknowledging the importance of sector differences, we have added a small long position in the tech-heavy Nasdaq to our European long position.

We think that gives us the right blend of exposure, picking up on euro area pessimism but avoiding making tech the dominant factor.

1. Source: Macrobond and LGIM calculations as at 3 November 2023

Willem Klijnstra

Currency Strategist

Willem is a stubborn Frisian, allegedly a descendant of an obscure hero resistance fighter called Grutte Pier (ca. 1480-1520). While in the office his focus is on currency movements; at home he does most of the moving as he chauffeurs his three young kids around. Mister currency is a sporty character with a balanced lifestyle – he enjoys burning lots of calories as much as he enjoys family sized bags of M&Ms.

Willem Klijnstra