Xu Xiaoqing: Data Shows U.S. Economy Returning to Lower Growth Rates (AI Translation)

【周刊提前读】徐小庆：数据显示美国经济增速向低增长回归

In May 2024, the U.S. services PMI rebounded to around 55, and non-farm payrolls surged to 270,000, marking the second-highest monthly increase this year [para. 1]. This shows substantial economic resilience, but other indicators reveal that growth in consumption, income, and household employment is slowing to pre-pandemic levels [para. 1].

Beginning this year, the month-on-month growth rate of actual disposable income for U.S. residents has fallen below pre-pandemic levels [para. 2]. The imbalance in the U.S. labor market has significantly eased, with job vacancies to unemployed individuals returning to nearly pre-pandemic levels. Monthly wage growth has remained around 0.5%, only slightly higher than the pre-pandemic rate of 0.4%. The month-on-month growth of disposable income, after accounting for taxes, is now almost the same as before the pandemic [para. 2].

This slowdown in income growth and a decrease in savings has reduced residents' consumption capacity [para. 3]. Although household spending remains higher than pre-pandemic levels, consumption of goods has shown negative growth, with only service consumption significantly surpassing pre-pandemic levels month-over-month [para. 3]. Adjusted for inflation, the overall month-over-month growth rate of real retail consumption has fallen below pre-pandemic levels, and even service consumption growth is only slightly higher than before the pandemic [para. 3].

The wealth effect of the stock market on consumption has weakened [para. 4]. Despite the US stock market surging nearly 30% over the past year, the effect on consumption growth has been minimal. This reflects the widening income gap among American residents post-pandemic. Low- to middle-income groups, who only hold 4.5% of their assets in stocks, are less affected by stock market performance [para. 4]. Additionally, recent gains in the market are concentrated in a few stocks, meaning most residents don’t benefit from the stock market's wealth effect [para. 4].

High-interest rates have led to deteriorating consumer credit, with default rates surpassing levels seen at the beginning of the last rate cut cycle [para. 5]. By the end of the first quarter of 2024, the delinquency rate on bank credit card loans rose to 3.2%, compared to a peak of 2.7% during the Fed’s rate cuts from 2019 to 2020. Auto loan default rates have also continued to rise, second only to peak levels during the subprime mortgage crisis [para. 5].

Despite the rising non-farm employment, the continuously rising unemployment rate indicates a decline in job quality [para. 6]. Non-farm employment has averaged above 250,000 monthly since 2023, far exceeding pre-pandemic levels, but the unemployment rate has risen to 4%, surpassing its rolling 27-month average [para. 6]. Historically, this trend often signals the onset of an economic recession [para. 6]. Data discrepancies between household survey employment figures and employer survey data further complicate the picture [para. 6].

The slowdown indicates that the marginal effect of fiscal easing is diminishing [para. 7]. Post-pandemic, U.S. fiscal expenditures as a percentage of GDP have significantly increased, while fiscal revenues remained unchanged. This implies that interest payments on national debt rely more on fiscal deficits from the new fiscal year. High-interest rates could raise interest payments to 20%-30% of fiscal expenditures in the next one to two years, which challenges the effectiveness of fiscal policy in stimulating the economy [para. 7].

The article questions whether U.S. stocks can continue to rise in an economic slowdown, especially if the Federal Reserve initiates a rate-cutting cycle in the latter half of the year [para. 8]. Since the beginning of the year, U.S. stock surges have primarily been driven by heavyweight technology stocks, while broader indexes like the Dow Jones Industrial Average have seen limited gains [para. 8]. Historically, a divergence between different stock indexes often signals a turning point [para. 8]. Currently, the ratio of the Dow to NASDAQ has fallen to around 2%, a historically low level seen only twice before, both times indicating a forthcoming market adjustment [para. 8].