The U.S. GDP data came out today and was much weaker than estimates. Growth was negative 1.4%, but there are a few caveats in the underlying data worth pointing out.
- The “Fiscal Drag” accelerated as spending declined further out of the federal government. There was a massive push of spending into the market throughout 2020-2021, but it has significantly dropped off and will continue to fall throughout 2022/2023.
- Imports shifted much higher as supply chains tried to “catch up.” We had a lumpy number that showed up in Q1.
- Inventories were negative after seeing a vast build in Q4 that was a drag on the GDP data.
Government transfers (still above pre-pandemic levels) have been falling and will continue to decline as COVID benefits continue to fade.
As inflation moves higher, putting any more fiscal stimulus into the market would only exacerbate the demand side of the equation and drive prices higher.
The U.S. is a net importer.
That will remain the case for years to come, even if we accelerate the onshoring of manufacturing.
The U.S. trade deficit widened to a record in March to $125.3B, with imports up 11.5%. If you have been to the store recently, you will have noticed that parts of the aisle are still bare or, at least, sparsely populated.
We had the supply chain catch up a bit, with delivery times getting shorter throughout Q1.
They were not back to normal, but the U.S. was one of the few countries that saw an improvement.
This increased our imports as ships were finally offloaded and moved throughout the system.
The Chinese lockdowns will make things exponentially worse for us, kicking off in May and progressively worsening throughout June and beyond.
During the first lockdown, it was concentrated further inland.
And while this created problems, it didn’t impact things to the level we see today.
The whole coast is essentially in some form of lockdown, which limits the number of ships entering and leaving the ports.
This also creates chaos for manufacturers. They don’t believe in the schedules and their ability to guarantee a spot on an incoming ship.
The result is there are many unknowns in delivery schedules and corporate planning.
We’re already seeing them get much worse in the near term.
And due to the uncertainty, the delays will only grow well above the recent record.
This will create an artificial “bump” in the GDP figures from a GDP perspective because our imports will drop, given the logistical nightmare.
Inventories have also been rising because retail sales (consumer spending) have slowed as prices shift higher.
The consumer is very fickle, making it difficult to pinpoint exactly when they will say “enough is enough.”
But we’re at the point where people are cutting back on non-essentials.
US inventories are elevated compared to final goods sales, which represent a leading indicator of slowing production and lower GDP growth.
This isn’t just a U.S. issue, as the same is playing out in key developed markets worldwide.
It’s all pointing to global consumer spending heading in the wrong direction, with the U.S. already negative and by far the most significant worldwide.
As U.S. consumer spending slows, this reverberates down the supply chain causing a broad shift in all markets, especially emerging markets.
A large part of the reduction in spending is driven by the significant drop in disposable income.
Many countries are already profoundly negative and falling further.
The chart below indicates prices are far outpacing wage increases, cutting into the disposable income available to be spent on goods and services.
The U.S. consumer makes up between 70% and 75% of GDP.
So when you consider a slowdown in the purchasing power of the average American, we have a lot of downside ahead.
It’s also showing up in the data for “Developed Market Consumer Confidence,” which is falling rapidly.
There are a lot of unknowns.
Fear in the market will cause consumers to close their wallets and companies to limit investments (the “I” in the GDP calculation).
Corporations are already signaling a broader slowdown as “expected new orders” and “expected growth rate of new orders” have moved steeply negative.
This is usually an excellent indicator for the future because many of these businesses have their fingers on the pulse of the global market.
A small benefit from all the government stimulus heading to consumers is the amount of credit card debt paid off… and is rapidly being put back on.
The U.S. added a record amount of new credit and revolving debt this past month, which is shocking even for us.
But, it also strengthens the point that the consumer relies more on credit and savings to maintain their current lifestyle.
The chart below shows that credit card debt is still below pre-COVID levels, especially when you factor in the vast credit expansion in March (not shown in the chart below).
A leading indicator of consumer stress is auto delinquency rates, which are above pre-COVID levels.
For some reason, U.S. consumers are quick not to pay their auto loans, and we are seeing that happen in a big way so far this year.
Many consumers refinanced their mortgages, so that is one saving grace in the near-term profile of the consumer.
There has also been a big jump in people borrowing from family and friends.
25.6 million people, more than 10% of all adults, relied on loans from those close to them to meet spending needs, according to the Census Bureau’s latest Household Pulse survey of finances, which covered the period from March 30 to April 11.
That figure was up from 19.1 million a year earlier when the question was first asked.
We are also seeing the savings rate drop off quickly and is now well below 2011 levels.
That’s a big concern when we look at the consumer’s health.
Here are just a few snapshots of how much pain the consumer is seeing right now.
We have “official” estimates moving even higher on the food front.
So, we’re far from over when we look at food at home and food away from home metrics.
These massive pressure points also lead to a significant slowdown in the housing market, with cracks forming and widening.
Considering the vast surge in purchase price with only a slight increase in earnings, it isn’t surprising to see people avoid or delay buying a home.
We have seen a decline in the square footage purchased, but now we are seeing a big drop in outright buying now that mortgage rates have surged higher.
There remains a big backlog of houses waiting to be built or still under construction.
The market is shifting quickly. Some will be sitting on costly inventory, given where material and labor costs have gone over the last two years.
All this puts the U.S. and emerging markets in a very precarious place as we move forward.
We have seen the U.S. 10-year spike higher, setting the rate for many of the developing/emerging market world.
As the rates shoot up, it creates a knock-on effect as countries won’t be able to borrow, trade slows, and inflation fears mount internally.
The international community has been spending USD and buying their local currency to maintain their “peg to the dollar” and control inflation. This is resulting in a big drop in foreign reserves that can only be replaced in one of two ways:
- Through a positive trade balance: about 85% of global trade is transacted in USD. This is a natural way to bring in extra USD.
- The other is to go into the market (or Fed window) to purchase USD.
As the U.S. consumer slows down further, the emerging market issues will only get worse as trade slows down further.
The U.S. is the largest consumer in the world.
We see a marked shift in spending patterns and rising rates…. Things will unhinge quickly as the potential for recession shifts much higher.
Freedom Financial News
