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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. The two big dollar store chains reported this week, and they are doing well. “Higher income households are trading into Dollar Tree, lower-income households are depending on us more than ever,” the company’s chief executive said. Dollar Tree’s shares, and those of rival Dollar General, are both up more than 50 per cent this year. Does the success of these deep discounters reflect a rapidly weakening economy? Read on. And send your comments: unhedged@ft.com.

The US slowdown (and how it ends)

The US economy, it seems safe to say, has weakened in the fourth quarter. The best indicator of this, in the absence of timely official data, is the private jobs data. Jobs growth had been declining all year, but according to the private data collectors ADP and Revelio, it has gone into reverse in the past few months.

Once you factor in public employment, the picture is probably worse. The 150,000 or so federal workers who took buyouts from the Department of Government Efficiency left government payrolls on October 1.

This is bad, but we know that it is not all that bad. As this newsletter has noted before, the job market cannot be in rapid decline if initial claims for unemployment insurance are stable, which they very much are — trending sideways at about 220,000 a month. Continuing claims have been stable since May, too. And if businesses were in the grip of fear about the economy, you would not expect business surveys to be trending stolidly sideways, which they are. Here are the ISM manufacturing and services new orders indices, in theory a leading indicator for activity:

Second, as we have discussed recently, consumer spending is weaker but still positive in real terms, which would not be the case if the jobs market was in a true downward spiral. Again, timely data is hard to come by but, for example, Bank of America credit and debit card spending figures through October show a flat-to-up pattern:

So, as indicated by private employment reports, the economy got a bit squishier in the fourth quarter; but, as indicated by consumer spending indicators and business surveys, it is not collapsing or falling into decline in real terms. You can keep adding other indicators and anecdotes, but at this point, that’s about all we can know.

What happens next? The consensus among Wall Street economists is that things will get better next year, because monetary and fiscal stimulus are on the way. The Federal Reserve is in cutting mode, and deficit-financed cash will start flowing out of the federal government in the spring, in the form of larger household and corporate tax refund cheques, courtesy of the retroactive provisions of this year’s budget bill. While this newsletter takes the view that the monetary part of that story is up in the air, the fiscal part makes sense to us.

Freya Beamish of TS Lombard expects US real GDP growth to accelerate from 1.8 per cent this year to 2.5 per cent in 2026. She sums up the fiscal case and ties it to the healthy corporate economy as follows:

Companies are not hiring, but they aren’t firing either. They are absorbing the tariff shock through productivity growth . . . they don’t need to fire, especially because growth profit margins are still well above 2019 levels. Then middle income [consumers are] about to get their tax refunds from last year as a result of retroactive effects. And lower income [consumers] next year will benefit from wage growth stabilisation owing to lower immigration. And they’ll probably get rebates [Trump’s “Tariff dividends”] which would be about $225bn even if they are only half the promised $2,000. Then non-tech capex can pick up as uncertainty stabilises, joining artificial intelligence capex.

While Unhedged buys this story broadly, the big risk to it — as we have noted before — is rising inflation. It would not take much of a resurgence to push core inflation above 4 per cent, which would take both lower rates and rebate cheques (or any other extraordinary fiscal measures) off the table immediately. And, while Unhedged would never forecast inflation, it seems to us that contracting labour supply, expansionary fiscal policy and loose financial conditions don’t make inflation less likely. Next year could be a very good one, but much is riding on stable prices.

One good read

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