Nowcasting the new regime: Is US Exceptionalism over?
Macro Insights
QuantCube’s latest insights into the US economic outlook
Did Donald Trump anticipate that one of the main consequences of his policies would be the relative underperformance of US financial assets?
The tit-for-tat tariffs announced in April served as a major catalyst for global investors to reduce their exposure to US markets. This shift had already been building momentum, driven by attractive valuations in Europe, the rise of China as a competitor to the US on the AI front (“the DeepSeek moment”), and Germany's fiscal pivot after the Munich conference.
The result? A sharp depreciation of the US dollar, weaker US equity performance, and a surprisingly muted response in the US bond market.
A Structural or Cyclical Shift?
A key question now is whether this move away from US assets signals a lasting change - or just a temporary deviation from the long-held belief in US exceptionalism.
The answer lies partly in structural confidence. The new administration’s stance has undermined global trust in the US dollar, calling into question its long-standing role as a safe-haven currency. But it is also a cyclical issue. Much depends on how the US economy responds to the policy shocks and the heightened uncertainty. In April, Reuters’ economist poll showed inflation expectations for 2025 rising to 3.2% (up from 2.2% in October), while GDP growth forecasts dropped to 1.4% (down from 1.9% in October, and 2.2% in March - just before the tariffs were announced). If the economy absorbs the shock well, confidence in US assets could rebound. If not, the rotation may mark the start of a longer-term shift.
What Nowcasting Can Reveal
Nowcasting models may not capture slow-moving shifts in global trust, but they can monitor the immediate economic impact of policy surprises.
QuantCube's indicators allow us to track real-time data in three key areas affected by tariffs: trade, confidence and inflation. As Figure 1 illustrates, the disruption for trade is already visible. Even before the tariffs took effect, US companies rushed to build inventories after the inauguration speech in January. This led to a spike in imports from China – clearly reflected in our AIS-based tracking of container ships entering US ports.
The subsequent decline and normalisation in ship arrivals suggest that many companies have shifted to a wait-and-see approach. As tariffs take effect, firms appear to be scaling back on new imports and instead relying on previously built-up inventories to meet demand. Looking ahead, this inventory drawdown could result in a further decline in import activity. In line with this, several US port authorities have already issued warnings about a sharp increase in “blank” or empty sailings in the upcoming weeks.
Business Cycle Implications
From a business cycle perspective, this stop-and-go pattern in trade flows and inventory management - reminiscent of the COVID-19 period - will complicate the interpretation of upcoming GDP data. The opposing effects of falling imports (which boost GDP) and inventory drawdowns (which subtract from it) may cancel each other out, obscuring the underlying growth signal.
As a result, the overall impact of trade disruptions on near-term US growth, remains uncertain. However, one clear consequence may be a hit to employment in the logistics sector, and potentially higher inflation if reduced imports lead to shortages of key goods become scarce.
The Confidence Effect
Beyond trade and inventory dynamics, the confidence effect may prove to be the most important driver of future growth. Recent business and consumer sentiment surveys show a steep decline in confidence. QuantCube’s Manufacturing Nowcast shown in Figure 2 reflects this downturn and currently signals a drop in the ISM index below the crucial 50-point threshold, indicating contraction.
While rising inflation expectations among households might have been expected to push up the savings rate, personal consumption expenditure (PCE) has so far remained resilient – providing a key source of support for the broader economy. QuantCube's PCE Nowcast points to continued robust growth at the start of the second quarter, as illustrated in Figure 3, with strength driven largely by steady spending in essential categories such as food and healthcare.
Perhaps the reason inflation has not yet responded strongly to the new tariffs is that their effects are still working their way through the system. In fact, price momentum is expected to ease again in April and early May, largely due to a sharp decline in oil prices driving down energy costs. So far, there is a limited impact of tariffs on goods inflation as Figure 4 illustrates. This can be attributed to three key factors:
Inventory Buffer – Many companies built up inventories in anticipation of the tariffs, which has delayed the pass-through of higher input costs to producer and consumer prices.
Shipping Lag - It typically takes a month for goods to travel from China and clear US customs. As a result, products facing the highest tariff rates are only now beginning to enter the US market.
Trade Composition – A significant share of US imports comes from Canada and Mexico, which have so far been excluded from the reciprocal tariffs. This has softened the inflationary impact.
Navigating Uncertainty: What the Data is (and isn’t) Telling Us
Our nowcasts point to three key takeaways. First, the transmission of recent policy shock to the real economy – particularly via trade, inventories, and sentiment - has started. Second, while the effects are visible, they remain moderate for now, largely because private consumption has been relatively insulated. Third, the inflationary impact has been muted, as the full effects of the tariffs have yet to pass through to consumer prices.
This measured assessment of the current economic landscape raises an important question: is it enough to justify a return to relative outperformance of US assets? One tentative conclusion is that the foundations of US exceptionalism remain intact – at least for now. Despite a negative headline GDP data in Q1, the underlying data was more constructive than it appeared on the surface.
Nevertheless, investors are likely to remain cautious. A clear rebound in hard data will probably be required before we see a meaningful repositioning towards US assets. In the meantime, market sentiment will continue to be highly sensitive to signals from the White House, making political communication a key short-term driver.
