the primary engine of economic expansion—will contract in the first quarter of 2024, marking the first quarterly fall since the pandemic’s start. Additionally, 21% of respondents predicted that the reverse would occur even sooner, in the fourth quarter of this year, as rising borrowing prices squeezed household budgets and COVID-era reserves were depleted.
The conclusion runs counter to the euphoria that has characterised US equity markets for the most of the summer, when low unemployment and declining inflation fueled expectations for a “soft landing.” Stocks may experience further declines if the economy stops expanding, a scenario that is fairly possible if consumer spending declines. Stocks have already declined from late-July highs.
“The likelihood of a soft landing, falling inflation, an end to Fed tightening, a peak in interest rates, a stable dollar, stable oil prices — all those things helped drive the market up,” claims Alec Young, chief investment strategist at MAPsignals. Stocks are susceptible if the market loses faith in that scenario.
The US economy currently seems to be accelerating rather than stagnating. On the strength of a recent uptick in household expenditure, which increased in July by the most in six months, growth is anticipated to pick up in the third quarter.
It appears almost like a last flourish to some commentators.
“The big question is: Is this consumption strength sustainable?” According to Anna Wong, the senior US economist at Bloomberg Economics, a recession will begin by year’s end. Because of these one-off variables, such as summer spending on blockbuster films and concert tours, “it is not sustainable.”
In spite of the largest price increases in decades, consumer spending has been supported by the US labour market’s ongoing strength. Some analysts have been prompted to delay or even abandon their predictions of a recession as a result.
Goldman Sachs Group Inc. economists anticipate that the consumer will continue to excel in 2024, maintaining economic expansion in the midst of stable job growth and salary increases that outpace inflation.
Three-quarters of MLIV Pulse respondents agreed with the Federal Reserve Bank of San Francisco’s research that the extra savings that have allowed consumers to weather the price surge will run out this quarter.
According to Thomas Simons, US economist at Jefferies, “there’s increasingly a problem where the lower end of the income and wealth spectrum is really struggling with the accumulated inflation of the last couple years,” while wealthier Americans are still protected by savings and asset appreciation.
Overall, he claimed, customers have shown some flexibility in the face of rising costs. But there will come a time when that will be impossible.
Credit card and vehicle loan delinquency rates are increasing as people struggle financially as a result of the Fed’s more than 5-point increase in interest rates.
Additionally, millions of Americans who benefited from the epidemic freeze on repayments are set to face a new due date for another type of debt—their college loans.
Mortgage rates are close to two-decade highs, according to the majority of investors in the MLIV Pulse survey, making credit availability and cost the largest challenge for consumers in the near future.
The markets haven’t fully factored in the risk that diminishing surplus savings and tighter consumer credit may affect car or retail stocks, according to about three-quarters of respondents. Tesla Inc. more than doubled in value this year, while General Motors Co. and Ford Motor Co. virtually missed out on the broader stock gain.
Investors are searching in a variety of locations for the solution because the future of the economy depends on what US consumers will do next.
When MLIV Pulse respondents were asked what they thought made a good leading indication, they mentioned everything from the most common metrics, such retail sales or credit card delinquencies, to airline bookings, pet adoptions, and the use of “Buy Now Pay Later” installment plans.
That may be due to the fact that traditional advisors have frequently shown themselves to be unreliable in the recent turbulent years.
In this post-pandemic context, using the conventional economic and market playbook is difficult, according to Keith Lerner, co-chief investment officer at Truist Wealth. “Things are just developing more slowly,”
The Bloomberg Markets Live team, which also manages the MLIV blog, conducts the weekly MLIV Pulse survey of Bloomberg News readers online and on the terminal. The MLIV Pulse survey this week asks if investors have fully regained the confidence in UK assets that they lost during Liz Truss’ brief tenure as prime minister.