Gradual return of official US statistics

After an unprecedented 43-day shutdown - the longest ever period of budgetary deadlock - official data has gradually started to flow from US statistical agencies. These latest figures confirm robust growth in the US economy, despite the Trump administration's April 2025 tariff shock.

An upswing in consumer spending by the wealthiest households and the AI investment cycle helped propel strong economic growth. Escalating geopolitical tensions at the start of the year, as President Trump ramped up his threats to annex Greenland, should not fundamentally undermine the scenario of continued moderate economic growth.

US growth fuelled by consumer spending

Coming in at an annualised rate of 4.4% – the fastest expansion in two years – third-quarter growth beat expectations once again. Household spending, the driver of the US economy, was up a blistering 3.5%.

However, once again, we are seeing a significant mismatch between the strength of actual spending data and the persistent slump in the various consumer confidence indicators.

For several years now, US consumer momentum has been powered by the very top tier of highest-income households, who have added significantly to their wealth. The richest 20% have seen their wealth increase to more than 70% of the nation’s wealth as a whole. Insensitive to inflation, the top earners are the real drivers of consumer spending in the United States. With income just keeping pace with inflation in real terms over the third quarter and the decline in household savings (from 5% to 4.2% in Q2), economic growth is clearly over-reliant on this thin slice of the population.

Artificial intelligence drives robust business investment

Although slowing slightly after an excellent first half (an annualised rate of 3.2%), non-residential investment continued strong as companies poured money into artificial intelligence, partially offset, however, by an increase in imports of technology goods.

After consumer spending, this rush of investment in AI sectors is the second most powerful engine of US growth. Yet there is concern around an increasing reliance on circular deals between the players in the chain – semiconductor manufacturers, hyperscalers and artificial intelligence application companies – as financial, industrial and technological links proliferate.

Weak job numbers and declining labour unit costs

Hiring remained anaemic in the United States with employers adding 15,000 jobs per month on average since July. Unemployment came in at a very low 4.4% with no striking imbalance apparent between labour market supply – constrained by a very tight immigration policy – and demand.

Household savings are low at under 5% of disposable income, which seems to justify why the Federal Reserve is more concerned about the labour market than inflation What’s more, unit labour costs have fallen over the past two quarters, reflecting good productivity gains and adding to companies’ profits. It’s likely that we are witnessing a structural increase in productivity, similar to the surge in productivity at the end of the 1990s during the massive technology investment boom of the dot com era. However, the scale and timing of these productivity gains remain highly uncertain.

The Fed under pressure, again

Annual inflation stayed at 2.7% in December in a reassuring development for a Federal Reserve that is still grappling with data disruption after the prolonged US government shutdown. Nonetheless, pressure on Fed Chair Jerome Powell intensified. He recently confirmed a summons by the US Justice Department in connection with his testimony before Congress on building renovations at the Federal Reserve headquarters.

The encouraging reaction of senior politicians, including some in the Republican camp, illustrates their desire to protect the independence of the monetary policy committee from political interference. That said, the Trump administration has stepped up its campaign of pressure to bring down rates. Without providing details on a possible timetable, the President recently ordered two semi-governmental agencies, Fannie Mae and Freddie Mac, to purchase $200 billion in securitised mortgage loans in a bid to push mortgage rates down and make housing more affordable. Trump also floated the idea of capping interest on credit cards at 10%, which looks good on paper but, if implemented, would tighten the supply of credit to households.

Positive eurozone growth ...

Although slightly down in December, leading indicators in the eurozone were positive. At 51.5 points, the composite PMI stayed in expansion territory, in line with growth close to potential. The outlook for Germany brightened in an encouraging sign for the eurozone. The German economy edged back to modest growth in 2025 after two consecutive years of decline, fuelled by a sharp acceleration in spending by consumers and government. The impact of Germany’s expansionary fiscal policy, which is already beginning to show in rising industrial orders, bodes well for the economy. German economic growth is expected to pick up in 2026 and 2027.

and lower inflation

The pace of price increases slowed to an annualised 1.9% in December, slipping in below the European Central Bank’s target of 2%. Inflation should continue to fall over the next few months as upward pressure on service prices eases. In their latest forecasts, European monetary authorities expect headline inflation of 1.9% in 2026 and 1.8% in 2027. While the ECB seems to have concluded its rate-cutting cycle (markets are not pricing in any further cuts this year), the ECB does have room to loosen policy further if growth slows unexpectedly in the near term in response to new trade tensions.

Chinese exports boom in 2025

International trade continued to fuel Chinese growth, despite the substantial hike in tariffs. Exports were up 5.5% in 2025, staying close to the 5.8% growth in 2024. Although exports to the United States were down a steep 20%, compared to +4% growth in 2024, China largely offset the drop by increasing exports to Europe (+8.5%) and Asia (+10.5%).

Risk assets still performing well at the start of 2026

Risk assets continue to benefit from the broadly expansionary global monetary and fiscal environment. However, volatility has returned to the financial markets amid rising geopolitical tensions. The United States’ threats to annex Greenland are a direct threat to the security of the European Union and throw the viability of NATO into question. The threat of additional punitive tariffs against several European countries if they oppose Trump’s demands to control Greenland is a worry for investors and will force the EU to react. Ultimately, we think de-escalation is the most likely outcome, with the United States being granted access to Greenland’s mineral resources.

Damien Petit, CFA, Head of Private Banking Investments,
Banque de Luxembourg