Weakening fundamentals give lie to story of US economic boom times
How strong is the US economy? Though this may not seem of great consequence for those living outside the US – especially in South Africa, during a week when the eyes of most economists were trained on the minister of finance delivering his Budget speech – its importance is hard to overstate.
Economists and investors love narratives, and the current consensus take on the US economy is a narrative like any other: it is booming. Emerging from the Covid pandemic, the US has been an achingly beautiful economic recovery story, according to most commentators.
The S&P 500, the primary US stock market benchmark, is hovering around all-time highs at more than 5,000 points, at least in part because of optimistic economic forecasts. In the latest AAII Sentiment Survey, the US bull-bear spread, or positive minus negative sentiment, is at an unusually high level, showing overwhelmingly positive attitudes to the economy in 2024.
This positivity is backed by headline data. US economic growth has surpassed most forecasters’ expectations, despite high interest rates and inflation. Unemployment is near record lows, and consumers have been spending freely.
And yet, as with all narratives, economists and investors are prone to simply extrapolate the strength of 2023 into 2024. Looking deeper into the data, things are not as robust as they seem.
First, the labour market may not be as “red-hot” as is the consensus view. Though a lot of Americans have jobs, what matters is the nature of those jobs – and which way the market is headed. Self-evidently, if an economy is at full employment, there is only one way unemployment can go.
The total payroll number for January was clearly impressive, but looking more closely, one sees a rather different picture.
Full-time employment has actually been flat since the US summer, and it fell last month. A rise in part-time work and people with multiple jobs may be propping up the overall numbers.
Second, though the consumer has been undeniably strong, it has been supercharged by once-off pandemic-era savings and government hand-outs. Those are now close to depletion, according to estimates from Capital Economics.
Going into 2024, the resilience of the consumer will be increasingly tested. Lead indicators are not encouraging: credit card and auto loan transitions into delinquency are rising and are above pre-pandemic levels. Average mortgage rates are still near 7%, close to a two-decade high.
Visa’s Spending Momentum Index, which draws on the company’s card usage data, suggests fewer consumers are spending more, relative to the previous year, for both discretionary and nondiscretionary items. The consumer is losing momentum.
Finally, as for corporate America, despite the largesse of Bidenomics fiscal spending and blow-out budget deficits, the business cycle seems to have turned. Higher interest rates are increasingly having an impact on profitability and bank lending standards remain tight.
The read across from the record-breaking stock market to the real economy is even less reliable than usual. The “magnificent seven” tech stocks – fuelled by thematic optimism about artificial intelligence – have driven the rise of the S&P 500 more than economic fundamentals.
As Tej Parikh points out in the Financial Times, the equal-weighted version of the index remains below the all-time high it set in early 2021. The Russell 2000 index of smaller companies is about 20% below its 2021 peak.
Faced with moderating aggregate demand and slowing fundamentals, much of what plays out in 2024 will come down to how quickly the Fed is able to cut interest rates. Investors are hopeful that, despite his hawkish rhetoric, governor Jay Powell will succumb to the pressures of the market in yet another “Fed put”.
All of this matters for South Africa. South Africa faces – at best – a stagnating economy in 2024, with GDP growth likely to be between 1% and 1.5%. Key indicators, such as a weak rand and a flat equity bourse on the JSE, confirm this rather bleak outlook for the domestic market.
However, this is with the assumption that the global economy, underpinned by the US, does not slow down.
If such forecasts turn out to be overly optimistic and the US stagnates or even goes into recession, given the impact on South African exports and a general risk-off sentiment, it will be hard not to see the domestic economy follow it downwards, and for South African risk assets to sell off even further. A challenging local economic context, because of events beyond its shores, may be about to get a lot more difficult.