US economy may stumble, not fall

FEARS of a US recession are mounting, yet the outlook remains far from conclusive.

This uncertainty has triggered volatility in global financial markets, with investors adopting a cautious stance in recent weeks.

Malaysia’s financial landscape has not been immune, witnessing fluctuations in equity prices and currency movements in response to shifting sentiment.

While growth in the United States is expected to slow in the coming months, multiple factors could mitigate the risk of an outright economic contraction.

Principal Asset Management, for one, is not convinced that the world’s largest economy would slip into a recession.

According to the fund management company, recession risks in the United States are not guaranteed, given several economic supports already in play or expected to emerge. Nevertheless, the fund management group acknowledges that “with animal spirits giving way to pessimism and fear, investor concerns around recession have spiked”.

Principal Asset Management observes that while US tariff policies are set to be tougher than during President Donald Trump’s first term, they are unlikely to be as severe as initially feared.

“The various exemptions already announced have reduced the likely tariff hit to US growth,” it explains. Early proposals that threatened a 25% tariff on all Mexican and Canadian goods, alongside a 10% blanket tariff on Chinese imports, have been softened.

With exemptions now factored in, Principal Asset Management estimates the resulting economic hit at 1.4%, down from the initial 1.6% forecast. Although tariffs could still weigh on growth, the group argues they are unlikely to be severe enough to plunge the US into recession.

Even if the new tariffs remain in place for some time, Principal Asset Management sees potential relief further down the line. “It is possible that some tariffs may be lowered, exempted, or even removed entirely,” it states, suggesting such moves could boost economic growth in the second half of 2025.

Rate cut

Policy support is also anticipated. Principal Asset Management expects the US Federal Reserve (Fed) to introduce monetary easing by late second quarter of 2025 (2Q25) or early 3Q25 if economic conditions deteriorate.

“Currently, the Fed is being held back from providing additional policy rate cuts because there is still limited evidence that the economy really needs immediate additional support,” it explains. Nonetheless, it expects two or three rate cuts this year, with a more aggressive easing stance possible if the labour market deteriorates.

On the fiscal front, Principal Asset Management predicts that the extension of the Tax Cuts and Jobs Act of 2017 is likely by year-end.

While this move alone is not stimulative, the Trump administration may pursue modest new household tax cuts, potentially using tariff revenue as funding.

The group believes such steps could offset the economic drag caused by tariffs.

Both household and corporate finances provide further insulation, it says.

“Household leverage, measured as liabilities as a percentage of net worth, is at its lowest level since 1975,” Principal Asset Management highlights.

Meanwhile, corporate cash buffers remain elevated, indicating businesses are better prepared to withstand revenue pressures. “These dynamics suggest that households and corporates are well-placed to withstand headwinds, a resilience that meaningfully reduces the risk of recession,” it argues.

Growth to rebound

Technological advancement may also lend economic support.

According to Principal Asset Management, the United States remains at the helm of technological advancement and innovation, with growing numbers of sectors and companies looking to benefit from the productivity gains that artificial intelligence can bring.

As such, Principal Asset Management points out that while economic growth is expected to slow to just 1.4% in the first half of 2025, it expects policy relief in the latter half of the year to stabilise momentum, reducing the likelihood of a recession.

Despite these positive factors, uncertainty remains a dominant theme.

Charles Schwab Corp underscores this by noting, “We often chuckle at the notion of ‘markets hating uncertainty,’ as if there are ever truly certain times.” Yet, the investment bank acknowledges that uncertainty has impacted both sentiment and data.

“Much of that has already been reflected in confidence metrics which, admittedly, went through a similar soft patch a couple of years ago, giving a ‘false’ recessionary signal,” it explains.

However, Charles Schwab warns that “if the soft data stay soft long enough, we see more risk of the hard data catching down.”

The firm sees government policy uncertainty as a significant contributor to the prevailing economic unease.

“Today, we are in the midst of a crisis of uncertainty – specifically regarding government policy,” Charles Schwab remarks, noting that the resulting spike in uncertainty has started to affect both “animal spirits” and “hard” economic data.

For instance, Citi’s Economic Surprise Index, which tracks economic data exceeding or missing expectations, has turned negative. Similarly, the Fed’s GDPNow “nowcast” reflects weaker growth projections, in part due to softer consumer spending and a surge in imports linked to pre-tariff stockpiling.

Charles Schwab observes that this backdrop has also impacted bond markets.

“Alongside growth worries, the 10-year US Treasury bond yield moved down to a recent low of 4.16% from a mid-January high of 4.8%,” it notes.

While bond yields typically move in response to inflation expectations, recent shifts appear to be tied to growth concerns.

“Lower yields reflecting lower inflation would typically mean better stock market performance; but that has not been the case over the past month,” the firm adds.

The correlation between bond yields and equities has turned positive, diverging from the typical inverse relationship. Equities, meanwhile, have fallen sharply since their February peak, mirroring patterns seen at the onset of the Covid-19 pandemic.

“Eerily, at the onset of the pandemic, stocks peaked on Feb 19, 2020, and exactly five years later, stocks peaked on Feb 19, 2025,” Charles Schwab points out.

The recent market turmoil has driven key indexes into correction or bear market territory.

“At the index level, the S&P 500, Nasdaq, and Russell 2000 are all in correction territory,” Charles Schwab notes. “In terms of the average member within each index, we are in correction and/or bear market territory per those maximum drawdowns.”

While the risks of recession have undoubtedly increased, Principal Asset Management advises investors to avoid assuming it as the base case. “Investors should not treat it as the base case – but neither should they dismiss the possibility outright.”