A perfect storm looming on US economy

by Gabriele Bonafede

Since the pausing of US-China high tariffs, financial markets have handsomely rallied. A new bullish mood brought indexes back to pre-tariffs levels.

Is it going to last? Not necessarily. In fact, all key indicators about real economy look particularly worrisome, at least for what concerns projections based on soft data.

Indeed, Main Street and Wall Street look to be going in opposite directions. Discrepancies between real economy and equity markets are growing every day. A large number of macroeconomic factors suggest that a perfect storm is looming on US economy.

US Treasury bonds: a steep rise in interest rates leading to unmanageable debt

Interest rates on US Treasury bonds have been under pressure since the announcement of tariffs, even when equities had been plunging in the first week of April. With the recent downgrade from Moody’s, pressure has mounted even further bringing interests on US Treasuries bonds at above 5%. The FED has still room for a number of operations, but such high interests are already exacting a painful toll across US economy and, especially, in the US public debt management.

On the most favourable scenario, perspective is unstable at least. Further increase in interests or bad news on next auctions can trigger a spiralling debt effect with appalling consequences.

Within this toxic environment brought about by tariffs, any intervention of the FED would anyway have multiple risks and conflicting effects on the exchange rates equilibria.

Overheated US equity markets

Wall Street has clearly recovered from the lows registered at the beginning of April. However, both long term and short-term indicators signal an overheated market paying more attention to past and current earnings than future development amid substantial tariffs and unstable trade relations of US with the rest of the world, and particularly with most important trade partners such as China, EU, Canada and Mexico.

Wall Street appear to be inconsistent with signals from Main Street for what concerns future short-term and medium-term perspectives. Equities have clearly benefited from a strong economy at the end of Biden’s mandate.

The good shape of US economy inherited by Trump’s administration from Biden has been an important factor to fuel rally and postpone negative effects of tariffs. But an overvalued market may prove to be way worse, with the risk of a much steeper decline once effects of tariffs are registered in hard data and quarterly earnings. Symptomatically, signs of a sudden tanking in the equity market are looming everyday stronger.

High prices looming for consumers and producers

Tariffs inevitably bear higher prices for households and firms. Although hard data do not show yet higher inflation, soft data point to price hikes at the least. This is more than clear in consumer’s forecast for inflation rates. The most recent survey of University of Michigan shows that even republican voters foresee a higher inflation in the coming weeks.

In the last few days big retailers such a Walmart, Target and others acknowledged that prices will increase soon. A six-week gap in the supply-chain for goods imported from China cannot be closed before mid-summer, bringing higher prices and empty shelves. Will a one-time price-hike become a steady higher inflation trend? Uncertainty about trade policy is certainly pointing on this direction because supply-chain is going from an abrupt fall in incoming goods to a transportation jam.

This stop-and-go logistics environment is most probably leading to higher prices over time at least for second, third and fourth 2025 quarters. Worse, a higher inflation environment with higher interest rates is likely to be accompanied by a recession or at least a steep slow-down. Stagflation is looming with all its wicked consequences for US economy. The picture is worsened by the fact that higher prices for components trickles down margins for US producers, especially in key industrial sectors such as the automotive industry.

Interest rates increasing in the housing market

A worrisome sign comes from housing market too. The structure of long-term housing loans keeps changing on the wrong side.

The number of mortgages with interest rates of 6% or more is steeply increasing, while cheaper mortgages are declining. Coupled with inflation and higher interest in general, this trend would be yet another engine for a perfect economic storm.

Housing market is often perceived as a key-indicator for ongoing and future health of the economy. High interests are clearly a sign of suffering as every property dealer knows – including Trump.

Yet, the current administration and too many an investor on equities are not yet convinced of the underlying risk, which would impact through the entire banking sector and US economy – as the crisis of 2008 has already taught.

Consumers sentiment plunging amid a Big Horrible Bill

Historic lows of consumers sentiment are looming still more powerful as a sign of recession ahead. Plagued with high borrowing, increasing interests and delinquency rates, shrinking disposable income for poorer households and mid-class, consumers are sensing the downturn much more than any other player.

Price hikes and inflation ahead are battering down consumer’s sentiment even more, pointing toward a recessive phase which is most probably already under way.

It will be difficult to reverse the trend, especially within the current uncertainty about tariffs. And the Trump’s administration tax bill looks horrible for lower income consumers, as it is clearly designed to benefit billionaires and higher income tiers. A fast approval of the so called “big beautiful tax bill” could make its effects even worse than expected.

Supply-chain stressed by high and unpredictable tariffs: more uncertainty looming

As it were not enough, stress already going in the supply-chain is bound to increase. Uncertainty and unpredictability of US tariffs and trade policy are worsening by the day. With his typically insane mode of communication, Trump unleashed today another devastating bomb on US economy via social networks.

“The European Union, which was formed for the primary purpose of taking advantage of the United States on trade , has been very difficult to deal with,” the US President wrote today on Truth Social site. “Our discussions with them are going nowhere!”.

Trump is suggesting a staggering 50% tariff rate on import from EU. This is a massive trade war announcement on a huge trade bloc theoretically allied to US.

Plagued by a 145% importing tariffs on China – even if paused just two weeks ago – the US supply chain is in tatters. The pause with China is making matters worse, because the unreliable trading environment is pushing importers and logistics sector toward another Covid-style jam on logistics hubs after a six-weeks gap in the supply system. And now, a unilateral, unsolicited and self-harming trade war has been declared by Trump on the EU too in the matter of a few seconds. This is yet another powerful element pushing toward a perfect storm looming on US economy.

There are additional signs of a looming storm, such as on the imbalances of the US health system, bankruptcy rates, farmers’ difficulties, and more. The storm is breeding and can strike at any moment on Wall Street too.

On cover, photo by Juan Carlos Ramirez on Unsplash.