Let's get to the big story.
Breakdown.
Wall Street is set for a higher open this morning and in the aftermath of the earnings, the State of the Union address in last week's Supreme Court ruling on tariffs, markets and as we head into the final month of Q1 next month, I am joined by James Knightley, chief international economist at ING James a lot to go through so first and foremost, Main Street is not Wall Street.
So where are we as we head into the final month of Q1 in terms of the economy?
I mean the economy is in reasonable shape, I think we're looking at the 6th consecutive year of growth in excess of 2%, very solid performance.
We've got unemployment which has ticked a little bit higher but it's still relatively low by historical standards.
We got equity markets close to all-time highs, so there's not a lot to really complain about that right now.
But I guess where we are a little bit more cautious.
Looking at areas of potential vulnerability and the issue for us as economists is we're looking at a lack of breadth to the growth we can see in the video it's earnings yesterday.
You look at the GDP report we got last Friday for the 4th quarter.
Business investment tied to software computing power that's rising 25% year on year.
All other business investment in the whole of the US economy has actually fallen for 5 quarters in a row, so you've got a real split.
Between the technology led sectors and the non-technology related sectors, and that just makes me a little bit nervous because you want a broad-based growth story to keep that narrative going and to insulate you from shocks and if you got all your bags in one basket as it were and that does create a vulnerability that's what we're a little bit nervous about headline everything great but just looking at and this morning all focus is on in video of course following those.
Blockbuster earnings, but when we take a step back and look at the US equity markets versus the other outperformance in the indexes around the globe that does tell you a story, but we do have to consider, as you mentioned, the stellar gains we've been seeing in the Dow, Nasdaq S&P 500, double digit percentage gains for 3 straight years.
So in terms of some of the potential shocks to the system.
I think if we look at the US economy, the vulnerability is that focus on tech and investment and also the high income consumers.
They're the ones driving the consumer spending story, middle and lower income households putting more pressure on their finances from inflation, from concerns about job security.
And also we've got to remember the bottom 60% of households by income only hold 15% of the wealth of America.
They have not benefited from rising stock markets, not benefited from rising property prices.
So what could derail the US growth?
It is largely the biggest risk is probably some sort of equity market revaluation or equity market price fall because. through wealth affects those high income households and it would also perhaps tighten the financial conditions surrounding lending tighter data centers, tighter technology.
So that I think is the biggest risk is if you do see any sort of valuation correction.
We're not forecasting it, but that is something that we're just a little bit cautious about.
And building on what you just said, I do want to get your take on the case shaped economy because you mentioned the American consumer and of course we've been seeing quite the discrepancy.
So are you seeing any stability when it comes to the case unfortunately not I mean where we look we see the case so I mentioned the investment side that the upper leg of the cave in technology, the downward leg being everything else in terms of business and likewise the consumer high income households spending very strongly.
Middle and low income households doing much less robust spending and even the jobs market.
We know that 4.5 million jobs have been added over the last 3 years, but they've all come in just three sectors leisure and hospitality, government and private healthcare services.
Every other sector is losing jobs.
So again that just highlights the lack of breadth of the growth story.
So it just makes the US more vulnerable if there was a shock of some.
And of course we can't talk about the economic outlook without talking about policy in particular monetary policy.
So where do you think the Fed will go heading into the rest of 2026.
I think the narrative from officials so far they seem very reluctant you know inflation is still above target unemployment is still pretty low and quite a lot of rate cuts already so just keep it keep things going and see how they're going, but we're going to have Kevin Walsh in all likelihood eventually coming through to be the new Fed chair.
And we are still nervous about that jobs story that is a key mandate for the US Fed, and if we do start to see more softening in those three areas where we are seeing jobs, that would be the catalyst, I think.
So it's the jobs market that's really going to drive the Fed story and we are looking for more rate cuts and while we're talking about this, I do want to get your take on the US currency.
So given what we've seen so far in Q1 of this year, do you expect more of the same for the dollar and what impact will that have?
I was in Europe for the last two weeks speaking to investors over there and there's a general sense that we've got an environment where European interest rates probably aren't going to change.
US interest rates are probably going to drop a little bit further.
That's normally a factor that will weigh on the dollar a little bit.
In terms of the whole idea of sell the dollar, sell the US narrative, it's simply not there in Europe at all.
There's still a real confidence in the US economy, medium to longer term.
It's just that perhaps a rebalancing, perhaps looking at other alternatives elsewhere, looking at alternatives in Europe, looking at alternatives in Asia, and again that adds to the sense of a gradual orderly softening of the dollar, perhaps down to 122 versus the euro.
And finally James before I let you go we digesting the state of the Union address that took place earlier this week, but when it comes to tail winds as well as headwinds that you're watching within the economic outlook, what would you say are the key takeaways from that address and what would you say to viewers out there I think fundamentally the US remains in very good shape as I said you know we're looking at the 6th consecutive year to 2.5% growth that's really, really good performance.
There's a lot to be pretty optimistic about it's just we want to see a little bit more bread that and hopefully you can get a bit more policy action on some fronts that can be delivered and we can continue to see the US continue to perform really really strong and before I let you go just expanding a little bit on that when it comes to expected stimulus for the US economy, what should we be watching out for obviously we got the interest rate cuts that we anticipating, but of course the tax refund season is kicking in.
That's going to put a little bit more cash.
Last year the average refund was about $3100 to $3200.
We're looking at something in excess of $4000 this time around.
That should be helpful.
And of course we've also got some of the tax cuts still feed through from the One Big Beautiful bill as well, so that should also give a little bit more impetus to the growth story.
And finally one last question for you about GDP growth here in the US the latest reading we got for the end of last year we saw a lower reading, but the partial government shutdown was part of that reading.
So what do you forecast as we head into 2026?
Yes, so I think you know it's pretty solid trend rate perhaps 2.5% growth for this year.
In the first quarter we are going to get a corresponding bounce back as you say the government shutdown had a larger depressing impact on that 4th quarter number than most people anticipated.
We should get a corresponding rebound for the 1st quarter that lifts the growth numbers, so we're probably looking at something close to 3% for the 1st quarter and in aggregate probably something around 2.5% for the full year.
Well, thank you so much for joining us.
A lot of headlines to so I appreciate your insights and your perspective.
Thank you.
