Is the US economy faking it?

Zheshang released a research report stating that the negative impact of the slowdown in US fundamentals and the uncertainty of Trump's policies may continue in the short term. After the implementation of Trump's tax cuts in the future, US corporate profits are still supported, which means that the US stock market may experience short-term adjustments but with a relatively small risk of a sharp drop. The breakthrough in Chinese artificial intelligence technology may bring about a "China-US technology re-balancing" narrative, which could pose a long-term risk to the US stock market. Future attention should be focused on the progress of the technology industry. Zheshang mentioned that starting in January, a series of US economic data including retail sales, manufacturing PMI, and existing home sales have been consistently below expectations, while import growth has noticeably strengthened, leading to a significantly weaker growth expectation for US Q1 GDP (especially the Atlanta Fed's GDPnow forecast value, which the market pays close attention to). The bank believes that this is mainly due to three major disruptive factors: the uncertainty of fiscal policy expectations, including tariffs, affecting confidence in US companies and markets; the US "import rush" widening the trade deficit, dragging down GDP; and government efficiency department layoffs affecting consumer expectations. The first two factors are expected to reverse in Q2, but the impact of government efficiency department layoffs on the US economy remains uncertain. Zheshang's main points are as follows: - In February, the unemployment rate increased, and the job market gradually cooled down. - US seasonally adjusted non-farm payroll employment in February increased by 151,000, compared to 125,000 in the previous month, slightly below market expectations for the second consecutive month. The unemployment rate was 4.1%, a slight increase from the previous month. The labor force participation rate declined to 62.4% from 62.6%, indicating a softening in short-term US employment resilience. Average hourly earnings were $35.93, with a month-on-month growth rate of 0.28%, slower than the previous month. - Government efficiency department layoffs have caused some disruption in the job market. In terms of structure, government department employment increased by 11,000, a slowdown from the 44,000 in the previous month. The "deferred layoffs" and "leave without pay" model of the government efficiency department layoffs has not yet been included in the unemployment figures. It is estimated that about 75,000 federal employees have accepted "postponed resignations" and will continue to receive salaries until September. - The recent slowdown in US fundamentals is mainly due to three major disruptive factors, with future attention on the impact of DOGE reform. Considering the uncertainty surrounding budget and tax cuts affecting market expectations, passing legislation in Q2 is expected to improve the situation. - Under the threat of Trump's tariffs, the US has seen an increase in "import rushing". Since Trump's victory in November 2024, the US trade deficit has widened rapidly due to increased imports. In November, December, and January 2025, the US goods trade deficit was $104.1 billion, $122 billion, and $153.3 billion, respectively, showing YoY increases of 18%, 38%, and 70%. This increase is largely attributed to the "import rush" under Trump's tariffs. - The increase in net imports is dragging down GDP growth, but is unlikely to be sustained throughout the year. According to estimates by the Atlanta Fed, the actual GDP growth in Q1 2025 in the US may be -2.4%, with net exports dragging it down by 3.8%. Looking ahead, Trump's tariff policy has been relatively aggressive, with two rounds of tariffs already imposed on China totaling 20%, and additional tariffs of 25% on Mexico and Canada. It is expected that on April 2, "equivalent tariffs" will be imposed on the European Union and India. Considering the potential impact of these tariffs, the feature of the US "import rushing" may not be sustainable throughout the year. - Government efficiency department layoffs continue to have an uncertain impact on the US economy. - The efficiency of the US government's employment accounts for 14.8% of total employment. The decline in government employment due to DOGE initiatives may have a negative impact on consumer expectations. In 2025, the number of government employees in the US is 23.615 million, accounting for 14.8% of total non-farm employment in the country. Among them, federal government employees number 3.007 million, accounting for 1.9% of total non-farm employment.According to the report from the US Office of Personnel Management, a total of 75,000 civil servants have experienced "delayed resignations", with the number of actual layoffs in a single month accounting for 2.5% of the total number of federal employees in the United States. In addition, attention should be paid to the spread of layoffs from the federal government to local governments. Elon Musk's rapid layoffs at the beginning of the year were partly due to seasonal factors. According to data on Social Security Retirement Insurance (SSRI) applications since 2016, the pace of retirement in the United States has been "higher at the beginning of the year and lower later", with an average level in Q1 about 6.2% higher than the annual average.Secondly, reducing fees and expenses will affect non-government employment. By cutting foreign aid, inefficient spending, and reducing employees, DOGE has saved a total of $105 billion as of March 5, 2025, with an average daily reduction of $2.4 billion. DOGE's actions of reducing fees and expenses may have an impact on private sector employment, as the February ADP employment data decrease was mainly contributed by public services-related departments: in February, the US ADP nonfarm payrolls decreased by 77,000 (previously 186,000), with trade, transportation, and utilities adding -33,000 (previously 47,000); education and health services adding -28,000 (previously 22,000); information industry adding -14,000 (previously 16,000), with these three industries less increasing by 160,000 compared to the previous month. At the same time, the US manufacturing sector added 18,000 jobs (previously -17,000), with an average monthly decrease of 6,600 jobs over the past two years. Looking ahead, there is still uncertainty about the impact of government efficiency measures on the US economy. Firstly, some of the savings include contracts that were already due to expire, with a certain level of exaggeration in scale. Secondly, the fluctuation in the speed of fee reduction is substantial, and its sustainability remains to be observed. In the short term, attention should be paid to the progress in the technology sector of the US stock market. Regarding the US dollar: the US dollar index is declining due to the slowdown in the US fundamentals, with the possibility of further escalation in March and April due to Trump's tariff policy. Currently, there are significant divisions in the parliaments of Japan, South Korea, France, and Germany, limiting fiscal space, and they may need to devalue the exchange rate to hedge the efficiency losses of trade frictions, which could further drive the US dollar upwards. The US dollar is expected to decline in the short term, but with limited space. In terms of US stocks, there is expected to be a short-term adjustment. The negative impact of the slowdown in the US fundamentals and the uncertainty of Trump's policies may persist in the short term. After the implementation of Trump's tax cuts, US corporate profits will still be supported, indicating that there may be a short-term adjustment in US stocks, but the risk of a sharp decline is relatively small. The potential "rebalancing of Chinese and American technology" brought about by the breakthrough in Chinese artificial intelligence technology may pose a long-term risk to US stocks, so attention should be paid to the progress in the technology industry in the future. In terms of US bonds, considering the impact of Trump's tariffs and the slowdown in the US fundamentals, there may be expectations of stagflation in the US economy in the short term, with US bond yields fluctuating widely between 4% and 5%, approaching the lower end of the range. Regarding gold, in the global geopolitical instability, central banks' continued gold purchases will be a long-term positive factor for the gold trend. Risk warning: Unexpected deterioration in US-China trade frictions; Overseas economic downturn beyond expectations.