Moody’s Credit Downgrade is a Lagging Indicator

Moody’s: Late to the Game

Moody’s announced on Friday, May 16^th it was downgrading the United States credit rating from Aa1 to Aaa and changed the outlook to stable from negative. Per Moody’s, “The downgrade reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”^[1] The downgrade led to an increase in yields on the 30-year and 10-year U.S. Treasury bonds. The 30-year yield increased by as much as 9 basis points to 5.03%, the highest since November 2023, while the 10-year yield reached 4.56%, approaching last month’s high. We find it important to note that Moody’s was the last of the three main ratings firms to remove the US top-tier rating, S&P Global Ratings was the first to move in 2011, while Fitch Ratings followed in 2023, both have the U.S. at AA+. In other words, this announcement is old news and not new information, which is why yields have reversed lower. 

Chart 1: Budget Deficit Improved After Previous Credit Rating Downgrades in 2011 & 2023^[2]

Moody’s is expecting federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and lower revenue generation. They are anticipating that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024. We would note – anything can happen between now and 2035 and view this news as noise, which is also the reason the markets actually rallied on the day.

While it is true that the fiscal deficit in the United States is an issue, we side 100% with Treasury Secretary Scott Bessent on his comments that, “Moody’s is a lagging indicator, and the downgrade was mainly in response to the fiscal conditions the Trump administration inherited.”^[3] The current policy mix of tariffs, tax increases, spending cuts, and tax cuts is likely to prevent the deficit from getting worse, although it remains to be seen how much it will improve the deficit. We appreciated this chart above, depicting how the budget deficit has improved after each of the other two credit downgrades in 2011 & 2023.

While the headlines will make the macroeconomic situation seem worse than it is, we continue our stance that we are seeing healthy indicators in multiple areas of the United States economy. For instance, the Atlanta Fed GDP Now tracker is running at +2.3% growth for Q2 in the face of tariffs. Inflation is continuing to tick lower with CPI now at 2.3% y/y from the high of 9% in 2022. Retail sales are strong, at +5.2% y/y growth, and the labor market is not showing any signs of weakness, with the initial jobless claims 4-week moving average of 230.5K. It is also a very good sign that companies in the S&P 500 are still exceeding earnings expectations in Q1, coming in at +12% y/y growth versus the 7% consensus expectations.

“Never Bet Against the American Consumer” 

Despite certain negative headlines, which include the recent US credit downgrade the U.S. consumer remains healthy. In fact, the consumer discretionary sector of the S&P 500 grew earnings by over 11% this past earnings season.^[4] The US consumer is 70% of the economy. Therefore, good consumer health usually bodes well for the nation.  And the services side of the economy remains in expansion with the PMIs above the 50 level. This is 75% of the consumption.  And when listening to consumer company conference calls, commentary remains bullish, and this ties back to the strong labor market, higher wages, and lower inflation. Gasoline prices alone are down 13% y/y, a very nice tailwind. 

The consumer discretionary sector has seen a nice recovery off the April lows. For instance, Walmart (WMT) posted a strong same-store sales figure of 4.8%. The company also noted growth across all income levels and a “very strong April.”^[5] Costco’s (COST) April sales echoed this dynamic with same-store sales rising 7.1% in the US, 6.5% for international, and 13% for e-commerce.^[6] Both retailers carry a wide range of products across discretionary and non-discretionary categories, which highlights the broad-based expenditure that the consumer is engaging in. Additionally, Home Depot (HD) said sales cadence in its Q1 improved in each month throughout the quarter and continued in the first few weeks of May^[7] Finally, Amazon (AMZN) noted that the company saw some strength in April.^[8]

Digging further into consumer company reports, Shark Ninja Inc. (SN), a consumer appliance and technology company, was able to grow revenue over 14%. The company noted in its earnings call that consumers are “clamoring” for their products, which are mainly discretionary in nature.^[9] Additionally, On Holding (ONON) a popular footwear brand, was able to grow revenue nearly 30%. ON Holding specifically mentioned strong consumer demand for their products “across all global markets and channels”.^[10] Both ONON and SN show that consumers are still spending on discretionary goods as well, and not only staples such as groceries.

The strength of the consumer is also showing up in crude oil product usage. Gasoline demand is increasing as we approach driving season. Demand for the refined product has surpassed the nine million barrel per day mark on a four-week average basis for the first time since November. Jet fuel demand has also hovered around record seasonal levels for the past few weeks.^[11] Strong demand for both products shows that people are still traveling at or near record levels. These datapoints coincide with the US TSA total traveler throughput, which is well above its three- and five-year averages.^[12] The consumer would not be spending all this time and money traveling if they were under immense financial pressure. It is important to remember that actual behavior does not always match up with sentiment surveys.

Chart 2: Five Year US TSA Checkpoint Numbers Total Traveler Throughput^[13]

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Sources:

^[1] Source: Moodys.com. As of May 16, 2025.

^[2] Source: Strategas As of May 19, 2025.

^[3] Source: FoxBusiness.com. As of May 19, 2025.

^[4] Source: Bloomberg As of May 19, 2025.

^[5] Source: Walmart As of May 8, 2025.

^[6] Source: MarketWatch As of May 7,2025.

^[7] Source Home Depot As of May 20, 2025.

^[8] Source: May 1, 2025.

^[9] Source: Shark Ninja As of May 8, 2025.

^[10] Source: On Holding As of May 13, 2025.

^[11] Source: Bloomberg As of May 14, 2025

^[12] Source: Bloomberg As of May 19, 2025

^[13] Source: Bloomberg As of May 19, 2025

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