The labour market is giving mixed signals.
The US economy is showing signs of deceleration, with falling profit margins and a decline in the leading economic index suggesting a potential slowdown in the coming quarters, according to the Amundi Investment Institute.
Mahmood Pradhan, Head of Global Macro Economics, Amundi Investment Institute noted “Rising delinquency rates on credit cards and auto loans signal to us the increased financial stress, especially among younger and lower-income households. This trend combined with restrictive monetary policy and high mortgage rates are contributing to low housing market activity and we expect this trend to also continue in 2024.”
Pradhan noted other signs pointing to a significant slowdown ahead in the US.
“The Conference Board’s Leading Economic Index dropped for the 22nd straight month in January, continuing to point towards a recession. This indicator suggests that weakness may start becoming more visible. Normally we would have expected a recession earlier, but this time around fiscal policy has been unusually active given low unemployment, together with excess household savings.“Industrial production is stagnating. Though computer and defence production have been strong and rising, overall manufacturing production has been deteriorating, driven by consumer-oriented companies in particular. Regional Fed manufacturing indicators remained on a weak trend and the latest manufacturing ISM posted its 16th straight month below 50, indicating protracted difficulties in manufacturing.“Declining profit margins (e.g. S&P 500, as per FactSet) will incentivise companies to cut unprofitable investments and unnecessary costs. Also, a weak outlook for profits of small businesses (as reported by the NFIB survey), which account for around 40% of employment in the US, are in recessionary territory. This should prompt likely reductions in non-residential investments, capex and employment.Real GDP has reaccelerated, while real GDI, which should be driving demand, has been flattish for seven quarters, something that is very unusual, said Pradhan. “The divergence between GDP and GDI suggests an increased reliance on borrowing and running down savings to fund demand, but we think that this situation will have to correct, especially in a higher rate environment.”“The weakness in January retail sales and a downward revision of November and December readings signal, in our opinion, a potential downshift in consumer spending – some survey data, such as Michigan consumer confidence, are down for the first time in six months. Some of the weakness was likely a payback following the rise in holiday spending. But we believe that real excess savings are being squeezed by ongoing high prices and the increased cost of borrowing, which are not accounted for in the inflation index, and we expect this to translate into further moderation ahead.”
Pradhan noted “The labour market is giving mixed signals. While payrolls posted upside surprises and the unemployment rate remains historically low, we see slowing cyclical employment and falling weekly hours (which are now back to pre-Covid levels) as evidence of slowing labour demand. Indeed, the low participation rate may have extended labour hoarding and companies may delay headcount reduction. But the labour market behaviour of workers is changing: the quit rate has been declining indicating that workers are finding it more difficult to switch jobs and many more workers holding two or more jobs; employment growth has stalled in the households survey; job vacancies and hiring are falling.
“In our view, this suggests a weakening in employment growth ahead and weaker wage growth as well,” he said.
