US economic strength narrative obscures weakening fundamentals

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, according to most commentators the US has been an achingly beautiful economic recovery story.  

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 due to 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 currently the consensus view. While 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.

While the total payroll number for January was clearly impressive, looking more closely one sees a rather different picture. Full-time employment has actually been flat since the summer, and it fell last month. A rise in part-time work and individuals with multiple jobs may be propping up the overall numbers.

Second, while the consumer has been undeniably strong, they have been supercharged by one-off pandemic-era savings and government handouts. Those are now close to depletion, according to estimates from Capital Economics. Going into 2024, the resilience of the American consumer will be increasingly tested. Lead indicators are not encouraging; credit card and auto loan transitions into delinquency are rising and above pre-pandemic levels. Average mortgage rates are still near 7%, close to a two-decade high.

Visa’s Spending Momentum Index, which draws upon the company’s card use data, suggests fewer consumers are spending more, relative to the previous year, for both discretionary and non-discretionary items. The American consumer is losing momentum.

Finally, as for corporate America, despite the largesse of Bidenomics fiscal spending and blowout budget deficits the business cycle seems to have turned. Higher interest rates are increasingly having an impact on profitability while bank lending standards remain tight. 

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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 quick 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”. To paraphrase Charles de Talleyrand’s comment on an admirer, they are hoping that does not flirt because he yields rather too easily. 

All of this matters for South Africa. As Ed Stoddard and Neesa Moodley write this week in Daily Maverick, 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 ZAR and flat equity bourse on the JSE, confirm this rather bleak outlook for the domestic market. 

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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 SA exports and a general risk off sentiment it will be hard not to see the SA economy follow it downwards, and for SA risk assets to sell off even further. A challenging domestic economic context could, thanks to events beyond its shores, be about to get a lot more difficult. DM