US Economy: Weekly Commentary – January 29, 2024.
Synopsis of US market sentiments
Surpassing expectations, the economy experienced notable growth, driven by increased government and consumer expenditures. Although inflation is on a downward trajectory, it is marked by fluctuations, even more now with the geo-political tensions. On the negative side, there are indications of a gradual cooling in the job market which must be closely watched.
The economy demonstrated strong performance in the final quarter of 2023, supporting the Federal Reserve's ability to sustain current interest rates, given the economy's resilience. Additionally, cutting rates shortly before the election is unlikely, as it could be perceived as aiding the current party. Conversely, the labour market is starting to experience the aftermath of the conclusion of the Christmas season.
The economy demonstrated strong performance in the final quarter of 2023, supporting the Federal Reserve's ability to sustain current interest rates, given the economy's resilience. Additionally, cutting rates shortly before the election is unlikely, as it could be perceived as aiding the current party. Conversely, the labour market is starting to experience the aftermath of the conclusion of the Christmas season.
Economic growth
Economic growth surprised on the upside due to an increase in government spending. This is a double-edged sword, in that whilst instrumental in driving economic expansion, it raises concerns about increased debt burden and the associated high interest rates. Despite the seemingly good growth data, bond yields saw a decrease as the GDP deflator surpassed expectations, standing at 1.9 per cent, which was eight-tenths below initial projections.
In the fourth quarter of 2023, the economy exceeded expectations by growing at a rate of 3.3 per cent, beating the projected 2 per cent. The main driver behind this surge was the increase in real consumer spending, marking a 2.8 per cent year-over-year rise, following up on the 3.1 per cent upswing in the prior quarter. This spending upward was mainly noted in both the services sector, particularly in medical care, and the goods sector, particularly recreational items, and vehicles.
However, the prominence of government spending in driving U.S. economic growth, albeit with slightly less influence compared to the previous quarter, raises concerns. This increased government expenditure has led to a significant spike in national debt, exceeding $800 billion in the fourth quarter, with interest on the debt already reaching a staggering $1 trillion. The United States government reaped significant benefits when the Federal Reserve initiated rate cuts, leading to a reduction in the interest payments on its debt. Sustaining such elevated spending levels throughout 2024 appears untenable for both the government and consumers.
Our perspective anticipates a slowdown in economic growth as consumer and government spending decline, and the labour market cools. The prevailing sentiment maintains that these declines will manifest more prominently in the latter half of the year.
In the fourth quarter of 2023, the economy exceeded expectations by growing at a rate of 3.3 per cent, beating the projected 2 per cent. The main driver behind this surge was the increase in real consumer spending, marking a 2.8 per cent year-over-year rise, following up on the 3.1 per cent upswing in the prior quarter. This spending upward was mainly noted in both the services sector, particularly in medical care, and the goods sector, particularly recreational items, and vehicles.
However, the prominence of government spending in driving U.S. economic growth, albeit with slightly less influence compared to the previous quarter, raises concerns. This increased government expenditure has led to a significant spike in national debt, exceeding $800 billion in the fourth quarter, with interest on the debt already reaching a staggering $1 trillion. The United States government reaped significant benefits when the Federal Reserve initiated rate cuts, leading to a reduction in the interest payments on its debt. Sustaining such elevated spending levels throughout 2024 appears untenable for both the government and consumers.
Our perspective anticipates a slowdown in economic growth as consumer and government spending decline, and the labour market cools. The prevailing sentiment maintains that these declines will manifest more prominently in the latter half of the year.
Inflation commentary
Inflation continues to exhibit a downward trajectory interspersed with minor rebounds. The forthcoming phase toward the target is anticipated to display heightened volatility.
The overall Personal Consumption Expenditure (PCE) data witnessed a 0.2 per cent rebound compared to the preceding month and remained unchanged at 2.6 per cent compared to the prior year. The core PCE, closely observed by the Federal Reserve, registered a 2.9 per cent year-over-year increase, showcasing an improvement from the 3.2 per cent figure in November. Notably, services, which are difficult to reduce inflation, experienced a 3.9 per cent year-on-year rise. Food prices contribute significantly to this upward trend.
Considering this positive trend in inflation, coupled with the decline in the GDP deflator, there is an overall alleviation of price pressures. It is important to keep a vigilant eye on geopolitical tensions in the Middle East, as they could potentially lead to inflationary spikes.
The overall Personal Consumption Expenditure (PCE) data witnessed a 0.2 per cent rebound compared to the preceding month and remained unchanged at 2.6 per cent compared to the prior year. The core PCE, closely observed by the Federal Reserve, registered a 2.9 per cent year-over-year increase, showcasing an improvement from the 3.2 per cent figure in November. Notably, services, which are difficult to reduce inflation, experienced a 3.9 per cent year-on-year rise. Food prices contribute significantly to this upward trend.
Considering this positive trend in inflation, coupled with the decline in the GDP deflator, there is an overall alleviation of price pressures. It is important to keep a vigilant eye on geopolitical tensions in the Middle East, as they could potentially lead to inflationary spikes.
Manufacturing commentary
Some light for the manufacturing sector which now is signalling expansion. The main risk is the rising tensions in the Middle East and the associated shipping issues.
US manufacturing PMI beats consensus and lands at 50.3 in January versus 47.9 marked in December. This is the best reading in more than one year. January services PMI also beats, coming in at 52.9 vs 51.5 consensus; was 51.4 in December. So now both, services, and manufacturing shift to expansion territory. Composite PMI is up mainly driven by service providers as manufacturers continued to see a drop in production amid supply issues, firms noted broadly sufficient availability of materials at suppliers, challenging trucking conditions due to storms and transportation delays reportedly weighed on vendor performance. These delays could put upward pressure on raw material prices. In terms of employment, the level of work grew for the first time since last April, with the expansion driven by service providers. Manufacturers, meanwhile, recorded a slower but still marked drop in work-in-hand. Besides, the pace of manufacturing input cost inflation picked up to the steepest since April 2023 amid challenges in sourcing materials, higher prices for transportation and increased fuel costs.
Our view is that prices will continue to see an upside risk to inflation, particularly on the manufacturing side due to attacks on shipping lines by Iran-aligned Houthi militants in the Red Sea and a drought in the Panama Canal. These increases come with lag and will not be seen immediately. However, it is a good sign that the manufacturing PMI is returning to expansion territory.
US manufacturing PMI beats consensus and lands at 50.3 in January versus 47.9 marked in December. This is the best reading in more than one year. January services PMI also beats, coming in at 52.9 vs 51.5 consensus; was 51.4 in December. So now both, services, and manufacturing shift to expansion territory. Composite PMI is up mainly driven by service providers as manufacturers continued to see a drop in production amid supply issues, firms noted broadly sufficient availability of materials at suppliers, challenging trucking conditions due to storms and transportation delays reportedly weighed on vendor performance. These delays could put upward pressure on raw material prices. In terms of employment, the level of work grew for the first time since last April, with the expansion driven by service providers. Manufacturers, meanwhile, recorded a slower but still marked drop in work-in-hand. Besides, the pace of manufacturing input cost inflation picked up to the steepest since April 2023 amid challenges in sourcing materials, higher prices for transportation and increased fuel costs.
Our view is that prices will continue to see an upside risk to inflation, particularly on the manufacturing side due to attacks on shipping lines by Iran-aligned Houthi militants in the Red Sea and a drought in the Panama Canal. These increases come with lag and will not be seen immediately. However, it is a good sign that the manufacturing PMI is returning to expansion territory.
Labour market commentary
Starting to suffer post-Christmas season effects. The labour market is starting to freeze, and the unemployment rate could rise in the months ahead.
The number of Americans filing for unemployment benefits rose by 25,000 to 214k in the week ending January 20, marking a notable rebound from the 16-month low recorded in the previous week, besides surpassing market expectations of 200k claims. Concurrently, continuing claims experienced a rise from 27,000 to 1,833k, slightly exceeding the market's anticipated figure of 1,828k. This suggests that individuals facing unemployment are encountering extended job search durations.
There's a clear indication in the market that the conclusion of the Christmas season is being felt. Anticipating more increases in claims until the onset of the summer season, it's conceivable that the unemployment rate could rise in the upcoming months. Such a scenario could align favourably with the Federal Reserve's inclination towards cutting rates.
The number of Americans filing for unemployment benefits rose by 25,000 to 214k in the week ending January 20, marking a notable rebound from the 16-month low recorded in the previous week, besides surpassing market expectations of 200k claims. Concurrently, continuing claims experienced a rise from 27,000 to 1,833k, slightly exceeding the market's anticipated figure of 1,828k. This suggests that individuals facing unemployment are encountering extended job search durations.
There's a clear indication in the market that the conclusion of the Christmas season is being felt. Anticipating more increases in claims until the onset of the summer season, it's conceivable that the unemployment rate could rise in the upcoming months. Such a scenario could align favourably with the Federal Reserve's inclination towards cutting rates.
Housing sector commentary
The housing market is showing a recovery with mortgage rates flat during January. A lack of supply could push prices higher again in the coming months.
After experiencing a challenging 2023 for existing home sales, there was an 8 per cent month-over-month increase in December, following a 9 per cent decline in November, attributed to a drop in mortgage rates. This surge marks the most substantial month-on-month rebound since the same period last December. Notably, despite the decrease in mortgage rates, the housing market is not fully recuperating, and builders are resorting to offering subsidies to help buyers.
Pending home sales witnessed a remarkable 8.3 per cent rise in December compared to the previous month, surpassing the consensus projection of a more modest 2 per cent growth. This surge represents the most significant increase in pending home sales since 2020. As a leading indicator based on contract signing, the spike in pending sales for December points towards positive developments in the housing market.
While the housing market is exhibiting signs of recovery, the mortgage rates have plateaued in January. Additionally, the limited supply of new and used house sales is stopping an easy reduction in prices.
After experiencing a challenging 2023 for existing home sales, there was an 8 per cent month-over-month increase in December, following a 9 per cent decline in November, attributed to a drop in mortgage rates. This surge marks the most substantial month-on-month rebound since the same period last December. Notably, despite the decrease in mortgage rates, the housing market is not fully recuperating, and builders are resorting to offering subsidies to help buyers.
Pending home sales witnessed a remarkable 8.3 per cent rise in December compared to the previous month, surpassing the consensus projection of a more modest 2 per cent growth. This surge represents the most significant increase in pending home sales since 2020. As a leading indicator based on contract signing, the spike in pending sales for December points towards positive developments in the housing market.
While the housing market is exhibiting signs of recovery, the mortgage rates have plateaued in January. Additionally, the limited supply of new and used house sales is stopping an easy reduction in prices.
Disclaimer
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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