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#60 - US Economy is booming! Isn't it?

The US real GDP growth for the third quarter of 2023 was revised upward to an impressive 5.2% quarter-over-quarter annualized rate. In year-over-year terms, real GDP grew by 3%, markedly outpacing the growth figures for the Euro Area, which teeters on the edge of recession. The latest data indicates a mere 0.1% year-over-year growth for the Euro Area and a contraction of 0.4% for Germany, its largest economy.

Currently, the US economy appears to be thriving, propelled by a robust labor market and strong domestic demand. Additionally, inflation is rapidly declining towards the Federal Reserve's 2% target. This decrease in inflation is happening even without further rate hikes, effectively raising the real policy rate and potentially paving the way for future rate reductions. Indeed, Fed Governor Waller has already hinted at a possible shift in rates if inflation stabilizes around the target for several months, regardless of low unemployment levels. This sentiment has been positively received by risk markets, with equities and bonds rallying significantly after these remarks and maintaining their gains following Federal Reserve Chair Powell’s decision not to counter these statements.

However, it might be premature to assume all is well for the US economy and risk markets in 2024. The robust Q3 growth figure could be overstating the actual health of the US economy for several reasons.

Firstly, a key factor in sustaining strong growth despite higher policy rates is the substantial amount of excess savings accumulated by households during the pandemic, courtesy of various fiscal policy programs. The Federal Reserve Bank of San Francisco estimates these savings at approximately USD 2.1 trillion post-pandemic. But, these savings have significantly dwindled from their August 2021 peak to around USD 350 billion, and they are likely to be exhausted by the end of 2023. Consequently, the spending power of US consumers might soon wane, potentially leading to weaker domestic demand in 2024. Figure: Cumulative aggregate excess savings of US households

Source: Federal Reserve of San Francisco

Secondly, the Gross Domestic Product (GDP) growth figure itself might be overstating the true pace of economic growth. The BEA calculates the official US economic growth using the GDP approach, while the Gross Domestic Income (GDI) is an alternative measure. In theory, GDP and GDI should align, but they can differ in practice due to varied methodologies, although these differences typically even out over time. However, a substantial deviation should not be ignored.

For instance, real GDI for Q3 2023 was reported at 1.5% QoQ annualized, significantly lower than the 5.2% real GDP growth rate. This discrepancy is not an anomaly. The accompanying chart illustrates the year-over-year differences between the two measures: while real GDP is at 3.0%, real GDI has declined by 0.2% year-over-year. This gap is the largest on record since at least the 1950s. Notably, the last time a similar deviation occurred was in 2007, just before the Great Financial Crisis and the subsequent recession.

Bottom Line

In conclusion, while the US economy appears to be booming in Q3 2023 with a 5.2% QoQ annualized growth rate, this figure might not accurately reflect the economy's current state or its outlook for 2024. With US consumers rapidly using up their excess savings, there might be less financial support for the economy next year. Moreover, the concerning real GDI figures, showing a 0.2% year-over-year decline, suggest that actual income growth could be significantly below trend, if not indicative of a recession. Therefore, the market's anticipation of Federal Reserve rate cuts in 2024 might not be overly optimistic after all. Good Luck!

Team MacrometR


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