- Christophe Barraud remains the top US economic forecaster despite post-COVID challenges.
- He uses extensive data collection and a rigorous three-part methodology for accurate predictions.
- Barraud predicts slower GDP growth, inflationary pressures, and a Trump victory.
Predicting the direction of the US economy hasn't been easy. Whether it's the markets or the Federal Open Market Committee, no one seems to be getting their forecasts right.
But if you want the closest thing to accuracy, French economist Christophe Barraud may be your best bet. The chief economist and strategist at Market Securities Monaco has been ranked the top US forecaster by Bloomberg since 2012 for all years but one and has continued to hold that position into the second quarter of 2024. As of the end of Q2, he also ranked second for Eurozone and China forecasts.
To be fair to everyone else, many economic indicators that worked over the past 40 years haven't been as reliable in a post-COVID environment. Even Barraud admits it's becoming increasingly difficult to make projections.
For decades, the S&P 500 was a good indicator of the US consumer's health. But many of its listed companies now have a global presence and their revenues are international.
Meanwhile, the stocks leading in gains are overly concentrated in mega-cap technology companies that don't represent the average US consumer's spending habits. The presence of retail investors has also skewed the index from increased untraditional trading behavior. His solution has been to sub it out with the Wilshire 5000, a broader US market-cap-weighted index.
But not every variable has a good substitute. Take the yield curve, for example. It has been inverted for two years as short-term interest rates exceeded longer-duration ones. This has historically been a recession indicator, yet, he noted, the economy remains resilient.
Then there's increased tensions in geopolitics, inflation, expanded monetary and fiscal policy, and a rise in political instability in advanced economies, he said.
Barraud's consistent accuracy isn't due to any tricks or a crystal ball. He stays ahead by employing a three-part methodology that has been key to his accuracy.
It starts with collecting as much data as possible across multiple fields, including economic, financial, and even satellite data. He then harmonizes the inputs before isolating the pertinent parts determined as key signals based on backtests. Finally, he employs additional models to challenge the projections and expose risks in the model to tighten outputs.
"In all this process, the key point is always to find new data that nobody is using because the difference is not coming from mathematics clearly, but the difference is really finding good data," Barraud said.
Since most of his clients are savvy hedge funds, his goal is to match their level of insight. This means continually seeking out the latest datasets that are typically only used by those funds.
Predicting the economy
Right now, Barraud has confidence in a few projections. One of which is his belief that the US economy will remain resilient in 2024, but with slower GDP growth at 2.4% this year, compared to last year's 2.5%. GDP is likely to drop below 2% next year as growth converges toward its long-term potential, he noted.
A sore part of the US economy is household consumption, which is being held down by dried-up savings and tight credit conditions amid a rise in delinquencies. He expects this tightness to last for a while as credit card interest rates remain elevated. Households won't be spending large for some time.
Meanwhile, the labor market should continue to normalize with fewer jobs created, along with a slow down of wage growth, he noted. June's unemployment rate came in at 4.1%, the highest since November 2021. He anticipates it reaching 4.2% by the final quarter of 2024.
As for rate cuts, he's making a call on one this year.
"We think that the September rate cut is a done deal just ahead of the election, but then it's more open," Barraud said. "It's very open for December, and it's very open for next year."
His September projection is in line with the market's expectation of an 86% chance of a 25-basis-point cut that month. As for another one in December, he sees it as a 50/50 chance. But the market's expectations of about 150 bps of cuts in 2025, or a Feds fund rate between 3.50 to 4, is too aggressive. It's almost impossible to predict how many cuts could come in next year, he said.
Looking forward, you can forget about the days when interest rates were near zero; expect a bottom at 3%. This goes for all advanced economies, which means debt will remain expensive and problematic for countries that are running up a deficit, he said.
Speaking of government debt, it's a global problem, he said. US fiscal policy is not sustainable as long as debt runs at 6% of GDP, he noted. At some point, the market will enter fear territory and react to the ballooning credit bubble. It's a predicament many advanced economies are in, including China, France, and Italy, he noted. A geopolitical race between the US and China is making things worse as they hike spending on key sectors like semiconductors, energy, electric vehicles, and quantum computing to compete.
On a positive note, US fiscal policy is expected to remain supportive of the economy through the Chips Act, and Inflation Reduction Act which could further stimulate non-residential investment in structures, he noted.
Right now, the market's biggest focus is on the election outcomes. And Barraud has a prediction for that too.
His base case scenario is a Donald Trump win in November, a forecast he has held for over a year but reinforced following the presidential debate. His outlook will remain that way as long as Trump is up against President Joe Biden.
However, a Trump victory is inflationary for the US economy on two fronts, he noted. First, restrictive immigration policy, which a Republican presidency is likely to implement, would lead to fewer people filling job openings, creating more supply than demand and putting pressure on wage growth. Thus far, higher immigration has helped fill jobs in key sectors such as hospitality which has tampered wage growth. Second, the likelihood of increased Tariffs on Chinese imports and on other countries' imports would raise prices on goods across various sectors.
One caveat is that Trump would need 60 seats in the Senate to implement policy changes smoothly, Barraud noted. Otherwise, his nominations or new bills could be up for endless debates, something 60 votes can end.
But if Trump is elected, it could be very good for the US stock market because he is very "corporate friendly" Barraud said. He's also likely to add pressure on the Fed to be very accommodative on rates.
Where uncertainty in a Trump presidency remains is on the geopolitical front, Barraud noted. In one scenario, Trump promised resolutions in global conflicts including Ukraine and Russia and in the Middle East. But he could also aggravate the situation.
Barraud's final comment is that predicting what the year 2025 will bring is very difficult because of all the unknowns, including a change in US administration. But he pointed to rising freight rates, an early indicator that there could be upward pressure on the prices of US goods. Meanwhile, the ongoing rise of housing prices could lead to a rebound of rents next year, he noted. If you couple these with a Trump victory, inflation could rebound in early 2025, or even sooner, forcing the Fed to be cautious in its cutting rate cycle.
