US Economy:Weekly Commentary – December 5, 2023
US Market Views Synopsis
Recent comments from the FED support our central thesis that the next move would be a cut rate in Q3 2024.
The fragility of the US economy means that the current level of rates is appropriate, and this is supported by the latest comments from the Fed, Powell has indicated that whilst the cycle of increases has most likely ended, the door remains open for more hikes if data coming month prove such a move is required. We see that the manufacturing sector is struggling, unchanged in the last reading the labour market is quite tight, and the housing market remains cold. Overall, we expect that at the next meeting on December 13, 2023, the Federal Reserve will keep rates at their current level and maintain them for a longer period than generally expected.
The fragility of the US economy means that the current level of rates is appropriate, and this is supported by the latest comments from the Fed, Powell has indicated that whilst the cycle of increases has most likely ended, the door remains open for more hikes if data coming month prove such a move is required. We see that the manufacturing sector is struggling, unchanged in the last reading the labour market is quite tight, and the housing market remains cold. Overall, we expect that at the next meeting on December 13, 2023, the Federal Reserve will keep rates at their current level and maintain them for a longer period than generally expected.
Economic growth
Growth surprised on the upside but the strength being observed will not be maintained for long since one of the biggest drivers was public spending which is expected to moderate. Consumer spending is tapering, so a combination of these factors will be reflected in lower growth going forward.
In the third quarter, GDP soared 5.2%, a significant jump from the previous quarter's 2.1% growth. This upward revision was mainly due to a 1.3% increase in non-residential fixed investment. Public spending also played a key role, increasing by 5.5%, representing one of the highest increases in almost three years and one of the strongest on record.
The backbone of the economy, consumer spending, underwent a downward revision from 4% to 3.6%. This downward adjustment suggests a tapering off in spending. Should this trend continue while growth relies heavily on government spending, it could lead to a surge in debt without meaningful growth to justify it.
Corporate profits saw a notable rise, rising 3.3% in the third quarter, a substantial jump from the previous quarter's mere 0.1% growth. However, this increase is 0.7% lower than the profits reported in the third quarter of the previous year.
This growth will slow down in the coming quarters and unlikely to be sustained with data such as manufacturing and consumer spending falling. With unemployment increasing, we suspect that consumer spending will continue to decline.
In the third quarter, GDP soared 5.2%, a significant jump from the previous quarter's 2.1% growth. This upward revision was mainly due to a 1.3% increase in non-residential fixed investment. Public spending also played a key role, increasing by 5.5%, representing one of the highest increases in almost three years and one of the strongest on record.
The backbone of the economy, consumer spending, underwent a downward revision from 4% to 3.6%. This downward adjustment suggests a tapering off in spending. Should this trend continue while growth relies heavily on government spending, it could lead to a surge in debt without meaningful growth to justify it.
Corporate profits saw a notable rise, rising 3.3% in the third quarter, a substantial jump from the previous quarter's mere 0.1% growth. However, this increase is 0.7% lower than the profits reported in the third quarter of the previous year.
This growth will slow down in the coming quarters and unlikely to be sustained with data such as manufacturing and consumer spending falling. With unemployment increasing, we suspect that consumer spending will continue to decline.
Inflation outlook
A decreasing trend has been seen since the summer of 2022, and we do not expect major upward pressure on inflation to recent highs (8% in 2022).
The Fed's favourite indicator for tracking inflation showed in October that inflationary pressures continue to moderate. The annual PCE inflation rate cooled to 3%, a level not seen since March 2021, from 3.4% in the previous three months. Meanwhile, annual core personal consumption spending inflation, which excludes food and energy, slowed to 3.5% from 3.7%, a new low since mid-2021. In line with expected. Besides, the high interest and high prices did that also the consumer spent less during October, the personal spending of 0.2 per cent, 0.5 per cent less than the previous month.
In general, as we have been seeing for some time, nothing has changed in terms of our thinking about Inflation. The trend is decreasing, and it only remains to see what the Fed's next decision is, which we believe will be to maintain and cut in Q3 2024.
The Fed's favourite indicator for tracking inflation showed in October that inflationary pressures continue to moderate. The annual PCE inflation rate cooled to 3%, a level not seen since March 2021, from 3.4% in the previous three months. Meanwhile, annual core personal consumption spending inflation, which excludes food and energy, slowed to 3.5% from 3.7%, a new low since mid-2021. In line with expected. Besides, the high interest and high prices did that also the consumer spent less during October, the personal spending of 0.2 per cent, 0.5 per cent less than the previous month.
In general, as we have been seeing for some time, nothing has changed in terms of our thinking about Inflation. The trend is decreasing, and it only remains to see what the Fed's next decision is, which we believe will be to maintain and cut in Q3 2024.
Labour market
The labour market continues to tell us that it is increasingly difficult to find a job putting pressure on the Fed to resist any calls for a hike.
The number of Americans filing for unemployment benefits rose by 7k to 218k in the week ending Nov. 25, up from the previous week's revised 211k but slightly below expectations. of the market of 220k. For their part, continuing claims increased by 86k to 1.927 million in the previous week, the highest level since November 2021.
Nothing new, the labour market continues to show a shortage of job offers for those who lose their jobs.
The number of Americans filing for unemployment benefits rose by 7k to 218k in the week ending Nov. 25, up from the previous week's revised 211k but slightly below expectations. of the market of 220k. For their part, continuing claims increased by 86k to 1.927 million in the previous week, the highest level since November 2021.
Nothing new, the labour market continues to show a shortage of job offers for those who lose their jobs.
The housing market commentary
Housing affordability is low, mortgage rates remain high and during September house prices also increased. This only benefits homeowner as the price of their homes is increasing in value.
New home sales fell 5.6 per cent in October. This comes in a scenario where housing affordability is at its lowest since the early 1980s, homebuilder sentiment falls, house prices rise, and mortgage rates remain high.
Actual new home sales figures fell short of expectations, with a final reading of 679k compared to the expected 721k. Given the current trend, further downward revisions are likely. October witnessed a month-on-month drop of 5.6 per cent, and even September's figures were revised downwards from 12.3 per cent to 8.6 per cent.
Despite a 1.8 per cent increase in building permits during October, it is crucial to note that this figure is still below the 10-month high of 1.541 million seen in August. Besides, pending home sales fell 1.5 per cent month-on-month in October, hitting a new all-time low. Future sales of existing homes, given homes that typically go under contract a month or two before selling, should decline in the coming months.
Additionally, during September, according to the S&P CoreLogic Case-Shiller National Home Price Index, the price rose again by 3.93 per cent year-on-year, the fastest pace since December 2022, and 0.30 per cent month-on-month.
Our outlook anticipates that housing market prices will increase as mortgage rates decline. This increase will be driven by increased demand, while supply is expected to remain stable. Therefore, the lack of affordability will persist for longer than the market expects.
New home sales fell 5.6 per cent in October. This comes in a scenario where housing affordability is at its lowest since the early 1980s, homebuilder sentiment falls, house prices rise, and mortgage rates remain high.
Actual new home sales figures fell short of expectations, with a final reading of 679k compared to the expected 721k. Given the current trend, further downward revisions are likely. October witnessed a month-on-month drop of 5.6 per cent, and even September's figures were revised downwards from 12.3 per cent to 8.6 per cent.
Despite a 1.8 per cent increase in building permits during October, it is crucial to note that this figure is still below the 10-month high of 1.541 million seen in August. Besides, pending home sales fell 1.5 per cent month-on-month in October, hitting a new all-time low. Future sales of existing homes, given homes that typically go under contract a month or two before selling, should decline in the coming months.
Additionally, during September, according to the S&P CoreLogic Case-Shiller National Home Price Index, the price rose again by 3.93 per cent year-on-year, the fastest pace since December 2022, and 0.30 per cent month-on-month.
Our outlook anticipates that housing market prices will increase as mortgage rates decline. This increase will be driven by increased demand, while supply is expected to remain stable. Therefore, the lack of affordability will persist for longer than the market expects.
Consumer Confidence
Consumer confidence rose, however, two-thirds of those surveyed still expect a recession in the next 12 months. Rate increases and increases in inflation continue to be of concern.
In November, consumer confidence saw a rise after a three-month decline. However, concerns about a possible recession persist, with around two-thirds of surveyed consumers still perceiving its likelihood within the next year, aligning with predictions of a short recession anticipated in the first half of 2024. Despite this, consumer concern about rising prices, conflicts, and higher interest rates persist, influencing sentiments.
More consumers viewed business conditions positively compared to the previous month, yet a simultaneous increase in negative perceptions surfaced. Despite mixed feelings about job availability, consumers' assessments of their family financial conditions improved, indicating a healthy financial outlook for the upcoming holiday season.
In November, consumers' outlook for the next six months recovered, showing greater confidence in job prospects, income and future business conditions. However, concerns remained about rising interest rates and a downward trajectory in stock prices. Although inflation expectations decreased slightly, intentions to purchase big-ticket items such as cars, homes, and appliances decreased, likely affected by high-interest rates.
Our projection anticipates a new drop in consumer confidence with the rise in unemployment. The growing trend of prolonged unemployment is already evident and will continue to grow in the coming months.
In November, consumer confidence saw a rise after a three-month decline. However, concerns about a possible recession persist, with around two-thirds of surveyed consumers still perceiving its likelihood within the next year, aligning with predictions of a short recession anticipated in the first half of 2024. Despite this, consumer concern about rising prices, conflicts, and higher interest rates persist, influencing sentiments.
More consumers viewed business conditions positively compared to the previous month, yet a simultaneous increase in negative perceptions surfaced. Despite mixed feelings about job availability, consumers' assessments of their family financial conditions improved, indicating a healthy financial outlook for the upcoming holiday season.
In November, consumers' outlook for the next six months recovered, showing greater confidence in job prospects, income and future business conditions. However, concerns remained about rising interest rates and a downward trajectory in stock prices. Although inflation expectations decreased slightly, intentions to purchase big-ticket items such as cars, homes, and appliances decreased, likely affected by high-interest rates.
Our projection anticipates a new drop in consumer confidence with the rise in unemployment. The growing trend of prolonged unemployment is already evident and will continue to grow in the coming months.
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No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750)
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved