Market Pulse
Monday, January 30, 2023
Despite the soaring cost of living and rapid successive increases in interest rates, the US economy remains resilient. Data released last week continued to show growth in personal consumption and resilient labour markets. Overall, US GDP (+2.9% annualised) grew faster than expected for the last quarter of 2022. [1].
Personal consumption, the biggest component of US GDP, slowed down more than expected but still grew at a healthy 2.1% annualised.
Stock markets rose after the GDP data was released as the market priced in a higher probability that the Fed might pull off an economic soft landing in 2023.
The Fed is trying to engineer an economic soft landing. This means they want to get inflation back under control by slowing down business and household spending. All without causing millions of people to lose their jobs. This is easier said than done but so far markets are giving them the benefit of the doubt. The S&P 500 index has rallied more than 10% from the October lows.
Predicting recessions is hard. There is a saying that economists predicted 10 out of the last 5 recessions. This time around it’s not any easier. The problem is the data. It’s giving mixed signals.
Rapidly rising inflation and rising interest rates should slow down personal consumption but so far there is little evidence of a big pullback. On top of that, the continued resilience of the labour markets are adding to the confusion.
While there has been a lot in the news about layoffs in big tech, the total number of layoffs have been small compared to the 150mn people in the US labour force. In fact, unemployment is close to the lowest it’s been for over 50 years[2].
Like consumers in some other developed countries, US consumers were able to build up a large amount of excess savings during the pandemic. But, thanks to the reopening of the economy and a rapidly rising cost of living, these savings are dwindling fast.
During 2022, excess savings in the US fell from $3.2trn to $1.2trn[3]. Soon they could be depleted and this is likely to impact personal consumption. As people run out of savings they are likely to turn to their credit cards to fill spending gaps.
In the third quarter of 2022 US credit card debt increased 15%. The average interest rate rose from 16% to just under 20% over the last year[4]. So people are adding more and more debt at higher rates of interest. This can’t go on indefinitely. If/when people start cutting their spending, employers are likely to start cutting jobs further.
Digging a bit deeper into the data shows cracks are already starting to appear. A key metric of how much US consumers are actually spending in the US economy is final sales to domestic purchasers (excluding the government). This adjusted metric adds imports purchased by US residents and excludes exports sold to non-US residents. This slowed down sharply in the previous quarter, falling from 1.1% to 0.2%[5].
For now US employment is holding up and markets are pricing in the probability of a soft landing. But, below the surface, there are signs of weakness. Excess savings are bound to run out and offer less support to the economy. Given high and rising interest rates, consumer credit won’t support spending for long. We are keeping a hawk's eye on any signs of weakness in US employment data.
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[1] https://www.ft.com/content/fbba8bba-b96b-498e-884c-fdd7be1b102f
[3] https://qz.com/pandemic-savings-for-poor-americans-run-out-in-2023-1849946092; https://www.ft.com/content/fbba8bba-b96b-498e-884c-fdd7be1b102f
[5] https://www.ft.com/content/fbba8bba-b96b-498e-884c-fdd7be1b102f
