Chanté Burger, Sygnia Portfolio Manager
As March unfolded, a series of economic surprises emerged in the United States, signalling potential shifts and challenges ahead. From unexpected rises in unemployment rates to concerning indicators in consumer spending and real estate, the economic landscape has become increasingly complex.
The unemployment rate increased unexpectedly from 3.7% to 3.9%, its highest rate in two years, while average hourly earnings fell, suggesting decelerating wage growth pressures. Similarly, the latest JOLTS data show the quits rate has continued to decline, and the employment components of the ISM manufacturing and services purchasing manager indices both contracted in February. The jobs data are consistent with a gradually softening labour market.
Retail sales rose 0.6% month-on-month in February, below consensus. With consumer Covid savings depleted, the US consumer is under pressure. Money and credit growth are weak, delinquency rates are rising for non-mortgage debt and banks have continued to tighten lending standards. Non-mortgage debt payments have surged (see chart) and, for the first time on record, interest payments on non-mortgage debts are as high as mortgage interest payments. This will constrain consumer spending and confidence.
Office real estate is a major risk. At nearly 20%, office market vacancy is at its highest since the data series began in 1979. The share of delinquent loans in commercial real estate collateralised loan obligations surged fourfold in January, to 8.6%. This suggests the Fed should cut interest rates sooner, but inflation has picked up slightly. Prices paid to US producers rose in February by the most in six months, driven by higher fuel and food costs, and the US core consumer price index came in slightly hotter than expected at 3.8%, though this was down from January’s 3.9%.
Fortunately, this is unlikely to change the Fed’s plans to cut interest rates in June. Fed Chair Jerome Powell made dovish comments at his semi-annual testimony to the Senate Banking Committee, adopting the language of European Central Bank President Christine Lagarde in his statement that inflation is “not far” from where it needs to be for the Fed to start cutting interest rates. In addition, the Fed lowered the bar to allow policy easing by raising expected core personal consumption expenditure for 2024 up to 2.6%, while still projecting three cuts this year.
Inflation could actually fall faster than these expectations. Chinese export prices are still falling, suggesting that the US will continue to import disinflation. Both the Zillow and New Tenant rent indices suggest lower owners’ equivalent rent, and the US has lost nearly 2 million full-time jobs over the last three months, suggesting payroll growth has been driven by part-time jobs.
ENDS
