Zheshang Securities: Is the U.S. economy a fake fall?

According to the Zhitong Finance APP, Zheshang Securities released a research report stating that the negative impact of the slowdown in the U.S. fundamentals and the uncertainty of Trump's policies may persist in the short term. However, after the implementation of Trump's tax cuts, U.S. corporate profits will still have support, which means that U.S. stocks may adjust in the short term but the risk of a crash is relatively small. The narrative of "U.S.-China technology rebalancing" brought about by breakthroughs in Chinese artificial intelligence technology may pose a long-term risk to U.S. stocks, with future attention on the progress of the technology industry.

Zheshang Securities mentioned that starting in January, a series of U.S. economic data, including retail, manufacturing PMI, and existing home sales, have continuously fallen short of expectations, while the growth rate of imports has significantly strengthened, leading to a notable weakening of the U.S. Q1 GDP growth expectations (especially the GDPnow forecast value from the Atlanta Federal Reserve, which the market is paying close attention to). The bank believes this is mainly due to three disruptive factors: first, the uncertainty of fiscal and tax policy expectations, including tariffs, affects U.S. corporate and market confidence; second, the U.S. "import grab" expands the trade deficit, dragging down GDP; third, layoffs in the Department of Efficiency affect consumer spending expectations. The first two factors are expected to reverse in Q2, but the impact of layoffs in the Department of Efficiency on the U.S. economy remains uncertain.

The main points of Zheshang Securities are as follows:

February unemployment rate rises, job market gradually cools

In February, the U.S. seasonally adjusted non-farm payrolls increased by 151,000, up from a previous value of 125,000, slightly below market expectations for two consecutive months; the unemployment rate is 4.1%, slightly up from the previous value; the labor force participation rate is 62.4%, down from the previous value of 62.6%, indicating a slight softening of U.S. employment resilience in the short term; the average hourly wage is $35.93, with a month-on-month growth rate of 0.28%, slowing compared to the previous month's growth rate.

Layoffs in the Department of Efficiency have caused some disturbances in the job market. First, from a structural perspective, the government sector added 11,000 jobs, down from 44,000 last month, showing a marginal slowdown. Second, the "delayed layoffs" model of the Department of Efficiency, which allows for "paid leave," has not yet been counted in unemployment figures. A spokesperson for the U.S. Office of Personnel Management (OPM) stated that approximately 75,000 federal employees have accepted "delayed resignations" and will retain their salary benefits until September.

Recently, the U.S. fundamentals have slowed down, mainly due to three disruptive factors, with future attention on the impact of DOGE reforms

Since January, a series of U.S. economic data, including retail, manufacturing PMI, and existing home sales, have continuously fallen short of expectations, while the growth rate of imports has significantly strengthened, leading to a notable weakening of the U.S. Q1 GDP growth expectations. The bank believes this is mainly due to three disruptive factors: first, the uncertainty of fiscal and tax policy expectations affects U.S. corporate capital expenditures; second, the U.S. "import grab" expands the trade deficit, dragging down GDP; third, layoffs in the Department of Efficiency affect consumer spending expectations.

The first two factors are expected to reverse in Q2, but the impact of DOGE reforms on the economy remains uncertain and requires further attention.

Budget and tax cuts still have uncertain impacts on market expectations, with potential improvements if the bill passes in Q2

As of March 6, 2025, the U.S. federal government's fiscal budget for 2025 has not been approved, and the government is currently maintaining expenditures through a temporary budget. The U.S. federal government's fiscal year begins in October and ends at the end of September the following year. Fiscal expenditures are determined by Congress through 12 appropriation bills. When the legislative process for fiscal appropriation bills cannot advance, Congress can also provide funding for government departments through a "temporary budget (CR, continuing resolution)." Future budgets still have uncertainties.

In addition, the prospects for tax reduction plans are temporarily undecided. On February 25, 2025, the House of Representatives passed the "budget resolution" with a vote of 217 to 215, which did not further increase tax reduction efforts but continued the previous Tax Cuts and Jobs Act (TCJA). The debt ceiling was also packaged in this resolution (raising approximately $4 trillion according to the current bill). The uncertainty in fiscal, tax, and tariff policies has significantly increased the U.S. economic policy uncertainty index since February.

Considering that the X-date for the debt ceiling is at the end of Q2, this hard constraint on the timeline may drive Congress to finalize a comprehensive fiscal bill in Q2. After the bill is passed, it is expected to reduce corporate expectations of fiscal uncertainty, improving market expectations and corporate confidence (for details, please refer to previous reports).

"Import rush" disrupts GDP growth rate, may reverse after Q2 equivalent tariffs are implemented

Under the threat of Trump tariffs, the U.S. has seen an "import rush." Since Trump's victory in November 2024, the U.S. trade deficit has rapidly widened due to increased imports, with the U.S. goods trade deficits in November, December, and January 2025 being $104.1 billion, $122 billion, and $153.3 billion, respectively, up 18%, 38%, and 70% year-on-year. The significant increase in the U.S. trade deficit is mainly due to the "import rush" caused by the threat of Trump tariffs. In January, exports were $172.2 billion (previously $168.8 billion), while goods imports were $325.4 billion (previously $290.8 billion).

The increase in net imports drags down GDP growth, but it is difficult to sustain throughout the year. According to estimates from the Atlanta Federal Reserve, the actual GDP growth rate in Q1 2025 may be -2.4%, with net exports dragging down GDP growth by 3.8%. Looking ahead, the pace of Trump's tariff policy is relatively aggressive, having imposed a total of 20% tariffs on China in two rounds and 25% tariffs on Mexico and Canada, with plans to impose "equivalent tariffs" on the EU and India on April 2. Considering that after the implementation of equivalent tariffs on April 2, the increase in Trump's tariffs may have exceeded the "10% increase on a global scale" promised during his campaign, the characteristics of the U.S. "import rush" are unlikely to persist throughout the year after Q2 2025.

Department of Efficiency cuts jobs and costs, the impact on the U.S. economy remains uncertain

First, employment in U.S. government departments accounts for 14.8% of total employment. DOGE is driving the U.S. government to cut jobs and costs, which has a negative impact on consumption expectations. In 2025, the number of employees in U.S. government departments is 23.615 million, accounting for 14.8% of total non-farm employment in the U.S., with federal government employees numbering 3.007 million, accounting for 1.9% of total non-farm employment. In February, the U.S. Office of Personnel Management reported that 75,000 civil servants had "delayed resignations," with the number of actual layoffs in a single month accounting for 2.5% of U.S. federal employees. Additionally, attention should be paid to the spread of layoffs from the federal government level to local governments. Musk's rapid layoffs at the beginning of the year have certain seasonal factors, and based on Social Security Retirement Insurance Application (SSRI) data since 2016, the retirement rhythm in the U.S. shows "high in the front and low in the back," with the average level in Q1 being about 6.2% higher than the annual level Secondly, the reduction of fees and costs affects employment in the non-government sector. DOGE has saved a total of $105 billion by cutting foreign aid, ineffective expenditures, and reducing employees as of March 5, 2025, averaging a daily cut of $2.4 billion. DOGE's cost-cutting actions may impact private sector employment, with the February ADP employment data reduction primarily contributed by public service-related sectors: in February, the U.S. ADP added only 77,000 non-farm jobs (previous value 186,000), with trade, transportation, and utilities losing 33,000 jobs (previous value 47,000); education and health services losing 28,000 jobs (previous value 22,000); and information industry adding 14,000 jobs (previous value 16,000), resulting in a month-on-month decrease of 160,000 jobs across these three industries. Meanwhile, the U.S. manufacturing sector saw a positive increase of 18,000 jobs (previous value -17,000), averaging a monthly reduction of 6,600 jobs over the past two years.

Looking ahead, the impact of the Department of Efficiency on the U.S. economy remains uncertain. Firstly, its savings include some contracts that were already due, which may exaggerate the scale. Secondly, the pace of cost reduction is highly volatile, and its sustainability remains to be observed.

U.S. stocks face short-term adjustments, focus on technology sector developments

Regarding the U.S. dollar: The dollar index is declining under the influence of slowing U.S. fundamentals. There is still a possibility of further escalation of Trump's tariff policies in March and April. Currently, significant differences in the parliaments of Japan, South Korea, France, and Germany limit fiscal space, which may require "beggar-thy-neighbor" strategies through currency depreciation to offset the efficiency losses from trade frictions, thereby pushing the dollar upward. The dollar is expected to decline in the short term, but the space for decline is limited.

In terms of U.S. stocks, there is a short-term adjustment. The negative impact of slowing U.S. fundamentals and uncertainty surrounding Trump's policies may persist in the short term. However, after the implementation of Trump's tax cuts, U.S. corporate profits will still have support, indicating that U.S. stocks may experience short-term adjustments but with a low risk of a crash. The narrative of "U.S.-China technology rebalancing" brought about by breakthroughs in Chinese artificial intelligence technology may pose a long-term risk to U.S. stocks, with future attention on developments in the technology industry.

Regarding U.S. Treasury bonds, considering the impact of Trump's tariffs and slowing U.S. fundamentals, there may be expectations of stagflation in the U.S. economy in the short term, with U.S. Treasury bond yields likely fluctuating widely between 4% and 5%, currently approaching the lower end of this range.

In terms of gold, under the backdrop of global geopolitical instability, central banks' continued purchases of gold will be beneficial for gold prices in the medium to long term.

Risk Warning: U.S.-China trade frictions worsen beyond expectations; overseas economies decline more than expected