US Economy Weakens, Inflation Persists: Overnight Economic News for New Zealand

The US economic picture darkened further this weekend, with revised data revealing weaker growth at the complete of 2025 and persistent inflationary pressures. These headwinds arrive at a particularly fraught moment, compounded by rising geopolitical instability and the looming uncertainty of the US presidential election. The confluence of factors is raising concerns about a potential slowdown, not just for the US, but with significant ripple effects for the global economy.

Core Personal Consumption Expenditures (PCE) inflation, the Federal Reserve’s preferred measure, rose at a 3.1% rate in January – the highest since late 2023. Data released by the Bureau of Economic Analysis shows that price increases in December and January were occurring at an annualized rate exceeding 4.5%, a trend that appears unlikely to have abated in the weeks since. This stubborn inflation complicates the Fed’s path, potentially delaying anticipated interest rate cuts and adding to economic strain.

Growth Revisions and Consumer Sentiment

The slowdown isn’t limited to price data. A second estimate of US economic expansion for the fourth quarter of 2025 revealed a significantly weaker performance than initially reported. The annualized growth rate was revised down to 0.7%, a substantial drop from the preliminary estimate of 1.4%. This marks the slowest pace of expansion since a contraction in the first quarter of 2025, and the downward revisions spanned multiple sectors – exports, consumer spending, government expenditure, and investment all contributed to the weaker overall figure. While imports decreased less than previously thought, this offered only limited offset.

Adding to the gloom, the University of Michigan’s sentiment survey for March registered a three-month low. While the decline was anticipated, inflation expectations did not fall as hoped, suggesting that consumers remain concerned about rising prices. The survey highlighted the impact of war uncertainty and soaring fuel costs – petrol prices are up 18% year-on-year and 9% in just the past week – on consumer morale. Sentiment is now 30% lower than it was two years ago, before the intensification of global geopolitical tensions.

Debt Concerns and Fiscal Imbalance

Beyond the immediate economic data, longer-term fiscal concerns are also coming into sharper focus. The Congressional Budget Office (CBO) is sounding the alarm about the trajectory of US federal debt, which currently stands at 101% of nominal GDP. Without significant changes to fiscal policy, the CBO projects that this figure could climb to 175% of GDP within the next 30 years. A key driver of this trend, according to the CBO’s February report, is a divergence in tax revenue sources: personal income taxes are up 10%, while corporate income taxes have fallen by 33%. The increase in tariff revenue, while substantial at US$109 billion, largely represents a tax burden shifted to American consumers.

Global Economic Signals

The US isn’t operating in isolation. Economic signals from other major economies paint a mixed picture. Canada’s labour market contracted sharply in February, shedding 83,900 jobs – far exceeding forecasts and prompting speculation that the Bank of Canada’s hiking cycle has come to an end. In contrast, India continues to experience robust loan growth, with a 14.5% increase in February, outpacing its overall GDP growth rate. Passenger vehicle sales in India also hit a record high in February, though the overall market remains smaller than those in China or the US.

China’s modern yuan loans rose by ¥900 billion in February, meeting expectations, but were slightly lower than the figures recorded in February 2025 and 2024. Commodity prices are generally rising, with significant increases in plastics (+32%), steel (+13%), aluminium (+14%), and bitumen (+35%) – developments that could further complicate efforts to control inflation globally.

Fuel Prices and Geopolitical Risk

The global scramble for fuel is intensifying, driven in part by instability in key transit routes. The situation in the Straits of Hormuz remains extremely volatile, adding to supply concerns and pushing up oil prices. American oil prices are now approaching US$97 per barrel, while Brent crude has surpassed US$101 – significant increases from levels seen just a week ago. This surge in energy costs is likely to exacerbate inflationary pressures and weigh on economic growth.

Market Reaction and Investor Sentiment

Financial markets have reacted to the deteriorating economic outlook. The UST 10-year yield has risen to 4.28%, up 8 basis points from Friday and 17 basis points for the week. The yield curve remains relatively flat, signaling investor uncertainty about future economic growth. Equity markets are also under pressure, with the S&P 500 down 0.4% on Friday and 0.8% for the week. European and Asian markets have also experienced declines. The CNN Fear & Greed index has moved into the “extreme fear” zone, reflecting widespread investor anxiety.

Gold and Bitcoin as Potential Safe Havens

Amidst the economic uncertainty, some investors are turning to traditional safe-haven assets. The price of gold has fallen slightly to US$5057/oz, down US$98 from a week ago, while silver is down US$4 at US$81/oz. Bitcoin, often touted as a digital safe haven, has seen a modest increase, trading at US$71,970 – up 5.4% from a week ago. But, volatility remains moderate.

Currency Movements and Regional Impacts

The US dollar has strengthened against the New Zealand dollar, with the Kiwi dollar sliding to just under 58.1 US cents. This proves down 1.5% for the week. Against the Australian dollar, the Kiwi is up slightly at 82.8 AU cents. The Japanese 10-year bond yield is up 7 bps at 2.25%. The Australian 10 year bond yield is up another +2 bps from Friday, up +10 bps for the week. And the NZ Government 10 year bond rate starts today little-changed at 4.69% but up +17 bps for the week.

What to Expect in the Coming Weeks

The coming weeks will be crucial for assessing the trajectory of the US economy. Key data releases, including inflation reports and employment figures, will provide further insights into the strength of the recovery. The Federal Reserve’s policy decisions will also be closely watched, as will developments in the geopolitical landscape. The US presidential election cycle will add another layer of uncertainty, potentially influencing both economic policy and market sentiment. The interplay of these factors will determine whether the US can navigate these challenging times and avoid a more prolonged economic downturn. The situation demands careful monitoring, not just for the US, but for the entire global economy.

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