The Interest-ing Squeeze
The US economy is showing mounting signs of strain, with several key indicators pointing to a potential slowdown. While select sectors continue to show resilience, underlying weaknesses in manufacturing, consumer finances, and the political arena threaten to derail sustained growth.
A key source of concern is the prolonged contraction in US factory activity. The ISM Manufacturing has stayed below the critical 50.0 threshold for eight months, signalling continued decline. Particularly troubling is the sustained contraction in New Orders, suggesting fading customer demand and business reluctance to invest or expand production, an early warning sign for the broader economy.
Consumer health, the backbone of US growth, is also showing cracks. Household debt continues to climb, and delinquency rates are increasing across multiple credit categories. Credit card and student loan delinquencies have been rising sharply, reflecting the growing strain on borrowers as high interest rates and persistent inflation erode disposable income. With more households dedicating a larger share of earnings to servicing debt, the capacity for sustained consumer spending, the lifeblood of GDP, appears to be weakening.
Moreover, auto loan defaults represent another concern. Delinquency rates, especially among subprime borrowers, are nearing historical highs as record vehicle prices, elevated interest rates, and depleted savings collide. Average monthly payments have become unsustainable for many, driving a surge in repossessions. While the auto debt market poses less systemic risk than the 2008 housing crisis, the spike in defaults underscores deep financial stress among lower- and middle-income Americans and highlights an uneven recovery that could weigh on overall growth.
Compounding these vulnerabilities is political dysfunction. The threat of a prolonged government shutdown or persistent legislative gridlock adds avoidable drag to the economy. The Congressional Budget Office (CBO) estimates that an extended shutdown permanently erases billions from real GDP. Federal furloughs, delayed investments, and suspended government operations all sap confidence and output.
The convergence of industrial contraction, mounting consumer distress, and political instability paints an increasingly fragile picture. Without policy clarity and renewed confidence, the US economy could soon move from resilience to retrenchment, heightening the risk of recession as it approaches 2026. Against this backdrop of economic fragility, investors are increasingly seeking stability and quality. Wealthy sovereign and quasi-sovereign bonds, backed by strong fiscal positions and reliable credit profiles, offer relative safety and steady income potential.
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