Transcript: Can anything stop the US economy?
This is an audio transcript of the Unhedged podcast episode: ‘Can anything stop the US economy?’
Robert Armstrong
Inflation, high interest rates, an AI bubble, bad sentiment, tariffs, a lousy housing market and, most recently, war. This year, the US economy has faced all of those things and kept on ticking.
Today on the show: what does it take to slow down the American economy?
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This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong coming to you from the centre of the universe, New York City. I am joined by the other half of the Unhedged newsletter, Aiden Reiter.
Aiden Reiter
Good morning.
Robert Armstrong
How did we get here, man? So, I mean, the thing that’s most amazing to me looking back is like two years ago, the federal funds rate went from basically zero to basically four, four plus.
Aiden Reiter
Mm-hmm. Four plus. We’re still four plus.
Robert Armstrong
Yeah, and we’re still at four plus and everybody, us included, is thinking this is gonna be bad. At some point, you have some kind of crisis. When you have that big, that quick increase in interest rates, something’s gonna crash.
Aiden Reiter
Yeah, there were definitely bad things in that period. Inflation’s bad.
Robert Armstrong
And we did have a little micro scares. We had the Silicon Valley Bank and a couple of other banks blew up. But the machine didn’t break. There was some hissing noises and some creaking, but the machine didn’t break.
Aiden Reiter
Yeah, I mean the steady ship US kept on sailing.
Robert Armstrong
Yeah. No, so that’s incredible and of course that came in the footsteps of inflation, which was a whole another challenge.
Aiden Reiter
Yeah, it had a lot of societal and political impact for sure. But in terms of the broader US economy, it continued to chug.
Robert Armstrong
It certainly cost the Democrats the presidency.
Aiden Reiter
Yes, and a lot of pain and a lot of families that we shouldn’t . . .
Robert Armstrong
That we shouldn’t overlook, but the measured as a whole, the economy charged through that.
Aiden Reiter
And ahead of all of our peers in the developed world.
Robert Armstrong
Yeah, and we never went into high unemployment. I mean, that’s the ultimate statistic for the economy. We’re a kind of four and a bit per cent unemployment rate economy still. Other horrors. I remember you and I thinking in January that when DeepSeek came out and it had made this for like $12, it had made an AI model that was as good as what Google and Microsoft had or appeared that way. And we thought, good lord, the AI boom is what is supporting both the stock market, the Magnificent 7 share prices and, to a real extent, the real economy, because people were shovelling billions on top of billions into data centres and chips and Nvidia and everything else. And we thought, wow, we’re gonna fall off a cliff here when people realise you don’t need to spend all this money.
Aiden Reiter
Yeah, but that rut lasted maybe a day and a half.
Robert Armstrong
Yeah, it’s funny. (Laughter) We were listening, I remember we were like, OK, we wrote this in a note. OK, we’re gonna listen to first-quarter tech results and they’re gonna tell us they’re cutting their data centre budgets and they are reorienting towards something else. Nope. Armstrong and Reiter, wrong again.
Aiden Reiter
It seems like a streak. (Laughter)
Robert Armstrong
OK, then while all this is happening, President Trump gets elected, and more than half of the country — companies, consumers, investors — decide everything is terrible. I mean, it is a partisan effect, but naturally, and so all our measures of sentiment fall through the floor.
Aiden Reiter
Yeah. I mean, like, near historic lows and sentiment were falling across the board, not just among Democrats and independents who might not like tariffs or the Trump administration. It’s Republicans, it’s wealthy people, poor people, the whole gamut.
Robert Armstrong
And company surveys where people are like, how’s business? They’re like, getting worse, actually.
Aiden Reiter
Yeah. Every signal from sentiment was flashing red.
Robert Armstrong
Red. Not orange — red. You know, and when it’s the CEO surveys and the corporate capital expenditure expectation surveys and the hiring expectation surveys, this is the stuff that scares you, right? Not like asking Joe Sixpack on the street how are things. I know Joe. He’s a grouchy bastard. You can’t get a nice word out of him. But you know, when the companies are saying this, it’s a huge deal.
Aiden Reiter
Well, we should throw on top of, you know, when tariffs hit and consumer sentiment bottomed out, so did international sentiment around the US. Everybody’s like, sell America, the US is done, we’re not going to buy US equities, we’re not going to not buy Treasuries.
Robert Armstrong
And there was serious talk about whether one of the main underpinnings of the US economy, which is the other flipside of our big trade imbalance is a capital flows imbalance. Those two things have to match. The money has to come from abroad to fund our spending.
Aiden Reiter
Our crazy, big deficit.
Robert Armstrong
Our crazy, big deficits in America. And there was a real worry that that wasn’t going to happen anymore.
Aiden Reiter
And we started seeing signs of that as we’ve talked about on this podcast before in the market. I mean, like very concerning signs, right? Dollars and yields breaking a correlation. Everybody’s selling off stocks in theory.
Robert Armstrong
Yeah, and there was a lot of comments and some actual numbers that suggested international portfolios were rebalancing away from the United States. And ultimately, if that happens, if it’s more expensive to finance our deficits with money from abroad, that causes a serious problem for America’s economy.
While we’re sitting here talking about shocks, it would be weird not to mention the fact that we have a very bad housing market. We had an awful new home sales number yesterday, and existing home sales are terrible too, because everybody who has a mortgage more than five years old isn’t gonna sell. So we’ve got an economy where one of the most important aspects of it, which is what people spend on buying, renovating, owning, selling houses is basically not working. And then, while we’re worrying about all this stuff, the Middle East goes to war.
Aiden Reiter
Yes it does. And not just the Middle East, the US comes straight in.
Robert Armstrong
Straight in. And all that isolationist talk, I mean, Janan Ganesh had a great column about this in our newspaper this week that basically pointed out, remember all that talk about how America is an isolationist? Well, there’s these 14 B-2 bombers that have a disagreement with that thesis. And that’s like, you know, Middle Eastern wars, that’s an issue for the world.
Aiden Reiter
Yeah. I mean, it’s an issue for the world. We should note that markets have pretty much ignored the prospect of Middle East wars for a while.
Robert Armstrong
So, not now, markets ignoring is, of course, the topic of this show, so let’s shift to that. Why is it possible that the largest and most important economy in the world can take these like Mike Tyson punches to the face, a series of them, and still be at four-something per cent unemployment rate, still we’re hearing great things from companies about profits, margins are high. The markets, of course, are perfectly sanguine about all of this. How is this possible?
Aiden Reiter
Well, we should note that there was a period of market disruption and concern immediately after tariffs.
Robert Armstrong
Yeah, yeah. “Liberation day” tried to ruin everything. But my point and it almost worked but it didn’t work.
Aiden Reiter
It didn’t work and we wrote yesterday that if you can kind of see there’s like this turning point in mid-May, where some of the old market paradigms kind of restart themselves. The market is climbing steadily. Not super fast, slowly, it’s actually approaching its all-time high again. Yields are finally behaving.
Robert Armstrong
I’m glad you mentioned that because I think that is the most important statistic. All of this stuff happened. And for the last couple of weeks, US Treasury yields — 10-year, 2-year or 30-year, whatever — are falling.
Aiden Reiter
Falling but at the same time as equities are rising. So bonds and stocks are actually correlated, which was what broke apart after “liberation day” then on top of that the dollar is now sliding alongside falling yields . . .
Robert Armstrong
Which is normal . . .
Aiden Reiter
. . . which is normal, which was not what was happening. What got everybody concerned in the month after “liberation day”. Yeah, this kind of started sometime around mid-May. And there’s not a clear cause as you’re intimating here. The cause is just like the markets have learned that the US economy is super resilient. And can look through a lot of these panics.
Robert Armstrong
Yeah, it’s kind of worth re-emphasising that point that you just made that the thing that the moment of fear was the moment when you had rising Treasury yields and a falling dollar at the same time. Because usually when the Treasury yield rises, money comes to the United States to say, oh, that’s a good yield, I’ll take some of that. And that money coming in, of course, has to change into dollars. That forces the dollar exchange rate up. When that doesn’t happen, when basically the credit rating of the United States as expressed by the Treasury yield is getting worse and the dollar is getting worse too, that’s a bad sign. And that has turned around.
But let’s return to the question of why the American economy is as resilient as it is. And I think what I would nominate as the most important single factor is that we came into this as crappy as the government’s balance sheet might be. And we probably should have emphasised among the trouble the fact that we have this budget right now. And we’ll get back to that. But the household balance sheets came in very good that since the great financial crisis when everybody tried to buy three houses in Las Vegas all at once and got hopelessly overleveraged, the US household balance sheet in aggregate has been very good. So the consumer is not leveraged out of the years, and that really helps support the economy.
Aiden Reiter
Yeah. Just looking right now at household debt service payments as a percentage of disposable personal income. So how much of your income are you spending on your debt? It’s still below where it was before Covid.
Robert Armstrong
And of course, the fact that the government sent everybody a bunch of cheques only improved that situation.
Aiden Reiter
And people weren’t paying money for things for a while, right? Because they were stuck at home and buying stuff on Amazon but not spending as much money as they would otherwise.
Robert Armstrong
So there’s a lot of complaints, I would say, to be made about how much the Trump and Biden administration spent basically wrapping the US economy in cotton wool. But we have experienced the benefits over the last year in that none of these shocks that have occurred has really shaken loose the American households’ good balance sheets and propensity to spend.
Aiden Reiter
Yeah, and you know, I think another piece of the equation, especially in the last four years in the Biden administration of why the US economy was resilient was immigration. You had really high immigration. That made the break even, your jobs number higher, it made you had a lot of people to throw out the problem of this hot economy and keep things a little bit cooler than they otherwise would have been.
Robert Armstrong
Yes, and we might have been in a worse situation with inflation.
Aiden Reiter
Way worse because wage inflation would have been gone way, way up. So that helped us weather a lot of the storm. Of course that’s kind of ending now. And we’ll see what that implies for the economy in the coming year.
Robert Armstrong
Yeah. Correct. I mean the counter-argument is that very high immigration has caused a lot of other social problems and so forth and so that’s all out there.
Aiden Reiter
Certainly. I mean, look, inflation in the past four years even with the economy being quote, unquote resilient, there’s all sorts of other social problems that have gone along with the quote, unquote resilient US economy.
Robert Armstrong
But from the kind of macro statistics level, immigration kept us out of hot water.
Aiden Reiter
Yeah, absolutely.
Robert Armstrong
That’s really true. OK, so we have a relatively unleveraged consumer, and we have some immigration flows that kept inflation under control.
Aiden Reiter
We have a pretty big fiscal impulse, and that’s sort of where we’re getting to with the Trump and Biden administrations wrapping the US economy in wool, right? But, I mean, it flows through to everything. If you have a government spending in the economy, a government that’s growing at the same time and rates are still high, you are able to support liquidity in the markets, you’re able to supported liquidity within the broader of the economy. You know, it allows you to keep things chugging.
Robert Armstrong
So in some kind of broad Keynesian way, the government did its job as the source of demand of last resort. Now, all of that is suggestive of a future problem, right? You can’t deficit your way to prosperity. But let’s put that aside for one second and we’ll talk about that shortly.
One thing that really made a big difference that has helped the American economy is the shale boom. Right? You know, we are, we’ve talked about this on the show quite recently, we’re now the world’s biggest oil producer, natural gas producer. That doesn’t just insulate us from the troubles in the Middle East. That insulates the whole world from the trouble in the Middle East.
Aiden Reiter
Yeah, it’s a global market.
Robert Armstrong
Right, the Middle Eastern oil nexus is just less important than it was. So a little war between a couple of countries in the Middle East is just a much less big of a deal than it would have been even 20 years ago.
Aiden Reiter
Yeah, it is really astonishing how markets are able to really look through Middle Eastern troubles, right? Yeah, I mean the market panicked a little a few times the past two years as Israel has fought both internally and with its neighbours. But the market essentially learned to shrug them off and the oil market learned shrugged them off.
Iran we thought would be the exception. Iran is a huge oil producer and crucially it controls the Strait of Hormuz. If they’d shut the Strait of Hormuz, which was theoretically on the table, I don’t think the oil market could have ever looked through. Twenty per cent of the global daily consumption, that volume goes through the Strait of Hormuz every single day. Because if you look at a map, it’s how all the ships get into Saudi Arabia, into Iran and a lot of the Gulf countries. So the market couldn’t look through that but shockingly, even when Trump bombed Iran, which would theoretically invite their retribution or would theoretically pull the US into a longer war in the Middle East, which would have implications for the US economy and the markets, markets not only didn’t care, the S&P 500 went up the day after.
Robert Armstrong
Yeah, yeah. I mean, it’s just important that the war didn’t turn into a disaster. Like, on the tree of possibilities that we were looking at, we have landed on a very benign branch. So far, knocking on all available pieces of wood, you know, we seem to be in a calm place.
Aiden Reiter
I think the broader picture we’re sketching is the reason the market was able to recover in the last month is because the US has just proved itself over and over again. And I think this same policy applies to the US economy itself, right? Once you prove you can outperform US exceptionalism or whatever else you want to call that, it’s self-reinforcing.
Robert Armstrong Y
eah, it’s self-reinforcing and it’s especially self-reinforcing on the market side of the economy. Yeah, I think that’s a really important point that the real economy and the market are not really all that separate. There is causal interplay between the two.
Aiden Reiter
They’re separate, but . . . (chuckles)
Robert Armstrong
They are separate and the real economy is obviously the more important part, but a market shock can cause an economic shock and obviously an economic shock can cause a market shock. And this incredible buy-the-dip mentality that has taken hold in US markets, that whatever happens that shocks the market, the smart thing to do is to buy it while it’s low. That is a kind of economic shock absorber, as well as a market shock absorber, because you don’t get that feedback loop going between the stock market, the bond market and the real economy.
Aiden Reiter
Yeah, but you know, as the resident pessimist of the Unhedged people, I feel like we have to acknowledge, like, this might not be sustainable.
Robert Armstrong
OK, good thing to say. Let’s talk about the future now. We’ve talked about the past and all the shocks. We’ve talk about the present, meaning why things are still so strong now. Let’s talk about the future. I’m gonna give you the stage to be Mr Pessimist, which is your role in both the newsletter and the podcast. (Laughter) What’s scaring you today, Aiden?
Aiden Reiter
What isn’t scaring me today? (Chuckles) So let’s start with the American exceptionalism piece that we just spoke about. As we said it’s self-reinforcing, it’s a huge benefit to the United States. A lot of people were concerned that Trump’s tariffs and you know all those actions were going to be the beginning of the end of American exceptionalism.
We think that was definitely overhyped for the month of April and May, right? If you look at data from the Fed, equity inflows — so people buying US equities from abroad — were still relatively high and actually rising.
Robert Armstrong
And bond inflows didn’t collapse either. They were weak.
Aiden Reiter
They were weak and there were two weak Treasury auctions, but they continued to around flat to a little bit up. It wasn’t catastrophe. But it takes a long time, especially for foreign pension funds, foreign banks who buy the bulk of US Treasuries to pivot away. So I mean, this could be the start of a longer-term trend and most people we’ve spoken with who are very well-versed in this are convinced that there will be a longer- term trend. It might not be absolute chaos. But it is concerning. It’s drip-drip, and especially for a country that runs these huge deficits, who needs to have cheap financing. It’s concerning.
Robert Armstrong
OK, that’s point. Here’s the optimistic counterpoint. The optimistic counterpoint is: where else you gonna go people? You want to put your money in Europe? I wish you good luck. You want to put your money in Japan? I wish you good luck. You want emerging markets? I wish you good luck. I just don’t think the alternatives are there. I’m sticking with Tina on this one — there is no alternative.
Aiden Reiter
I think that there’s probably no alternative right now, but I think there’s a case to be made for all three of those things you just mentioned — Japan, Europe and EMs — to rise in the coming years for a variety of reasons which we don’t need to get into.
Robert Armstrong
I’ll believe it when I see it. Now, the thing that worries me, as we intimated before, the US is addicted to deficit spending. And at some point, the people who are lending the money demand to be paid more for doing so, the US budget becomes unmanageable, Treasury yields spiral up and we are forced as a country either into austerity, like growing up and having a more balanced budget, which would cause a recession and a market crash, in my view. Or we are forced to inflate our way out of our trouble or use some other wicked financial trick to get out of our trouble. And we are playing chicken with that right now with the budget negotiations that we’re having.
Aiden Reiter
And we’re starting to see some like fringe financial engineering starting to take place. So we’ve written a lot about the supplementary leverage ratio, which essentially . . .
Robert Armstrong
Allows banks to hold more Treasuries.
Aiden Reiter
Yeah, yeah, there’s this new regulation that’s adjusting this bank regulatory ratio that is allowing banks to hold more Treasuries. On top of that, you have the Genius Act which is getting stablecoins to hold more Treasuries. I mean there’s a lot of things that are starting to happen around the fringes that could come to bite us.
Robert Armstrong
Countries that have financial trouble, one thing they standardly do is they try to trick private sector institutions into owning more and more of their debt. And unless you are Japan, that tends to end badly.
Aiden Reiter
Yeah, and who’s to say if it would end badly here? Also, there’s plenty of arguments for why you would make some of those adjustments that are not nefarious. But it’s something to keep an eye on.
Robert Armstrong
OK, that is the pessimistic point, and I will give you the optimistic counterpoint. We still have the best corporate economy in the world. It’s an incredible engine of prosperity, American companies, and if you make even a modest adjustment, the American economy can grow its way out of a lot of trouble. You don’t have to be a saint, fiscal-wise. You just have to be less of a sinner. And then the corporate economy will get you out of trouble.
Aiden Reiter
My one-word counterpoint is: tariffs. We don’t know what will happen with tariffs.
Robert Armstrong
Correct, yes. OK.
Aiden Reiter
We don’t know where they’ll be. That will flow through to the economy itself. And there’s so many rumblings about what will be the result.
Robert Armstrong
I was trying, Aiden, to end on an optimistic point. But you just refused.
Aiden Reiter
We had to say tariffs. We had to, we had to . . . I completely agree with you, but we had to mention tariffs.
Robert Armstrong
I want listeners to know that Aiden sits over on the other side of this table and there’s like a little cloud over just his head that it’s constantly raining.
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It’s sunny over on this side of the table and we will be back after a short break with Long and Short.
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Listeners, welcome back. This is Long and Short, that section of the show where you go long things we like and short things we don’t like. Aiden, you complain so much in the body of the show that I’m sure you have something you are long.
Aiden Reiter
Yes, I am long impulse grocery buys. I was in the grocery store near me. I saw guavas. I don’t particularly like guavas, yet I still bought the guavas and last night I made guava jelly and I’m very happy.
Robert Armstrong
I think you are in the world capital of the impulse grocery buyers. There’s so many ethnic grocery stores in New York City that there is food you’ve never seen before, crosses your path all the time, and I agree with you, just buy it.
I am long the Citigroup buy note. I was going through my inbox this morning and there was a research note from another large bank saying Citigroup finally has its stuff together. And it’s going to start catching up to the other banks in profitability and markets are going to love it again and you’re going to make a lot of money owning the stock. I have been reading literally that exact research note for 20 years from the day I entered finance. And so whatever happens with Citigroup, I wish them well. I hope this note is correct. But one thing I’m telling you is that the Citigroup buy note, it’s different this time, will exist as long as Wall Street exists.
Listeners, we will be back in your feed next week. Until then, stay cool.
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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio.
Special thanks to Laura Clarke, Alistair Mackie, Gretta Cohn, and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Rob Armstrong, thanks for listening.