L'AGEFI - Health of the US Economy

Translation of an article published by L'AGEFI on 15 February 2024
By Michala MARCUSSEN, Group Chief Economist

The US economy has shown surprising strength with the latest forecasts showing GDP growth expectations for 2024 at close to 2%, for the forecasts in the Bloomberg survey collect in February. This stands in sharp contrast to the consensus low of just 0.6% observed last August. A notable gap has further emerged between the euro area, where consensus for 2024 growth now stands at just 0.5%, just half the level expected last August. While less spectacular than for the euro area, the consensus for the other major regions is generally today on the softer side of expectations last August, making the US something of a global exception.

Part of the story behind the US strength is explained by a virtuous circle of disinflation that has given consumers the confidence to spend, in turn supporting job creation and thus adding yet more confidence to consumers. Firm productivity gains, moreover, allowed room for wage gains without causing any major concerns about wage-price spiral emerging. Real personal income growth increased by just over 4% in 2023, after a 6% contraction in 2022.

A further positive twist for corporates has come from the seemingly limited impact of monetary policy tightening on corporate balance sheets with net interest payments remaining low, and this despite one of the most aggressive Fed rate hike cycles on record. Part of the explanation is likely found in the positive renumeration now enjoyed by corporates on cash balances, while at the same time benefitting from long duration debt. Looking at the national accounts, net interest payments have even declined, although we note that numbers could in subsequent releases see some revision.

Looking ahead, we nonetheless expect to see less favourable dynamics as a wave of corporate debt comes due to be refinanced. The commercial real estate market is an area of particular concern in this respect. The dynamics for US household balance sheets, moreover, also hold some fragility. With excess pandemic savings now largely exhausted and the household savings rate standing at just 3.7%, well below the long-term average of the pre-pandemic decade of around 6%. Even a moderate increase in the unemployment rate could bring about substantial adjustment to consumption.

The key issues for the US economy over the coming quarters, however, will reside with the labour market dynamics. Although January posted a spectacular job gain with unemployment at just 3.7%, the drop of in the number of people quitting their jobs and a decline in the number of hours worked are hints that some softening is likely in the pipeline. Survey data further confirm a picture of lower hiring ahead.

A point worth particular to note in this context is that much of the recent strength in the US labour market has come from just a few sectors, and most recently concentrated in health care. Around a third of the nearly 3 million jobs created by the US economy over the past year have come from heath care and social assistance, and this despite the fact that the sector accounts for around 14% of total jobs. Part of this strong dynamic can be explained by post-pandemic catch-up as the sector has sought to engage permanent staff after suffering severe shortages during the pandemic and as patients have opted for elective procedures delayed during the pandemic.

Heath care demand is from a structural point of view likely to be sustained by an ageing population and the prevalence of chronic health conditions. From a cyclical point of view, moreover, it tends to be one of the more resilient sectors as health care expenditures are often less easily trimmed. It is thus unsurprising that the BLS project health care and social services to be one of the strongest growing sectors in the US over the coming decade. The pace of hiring projected by the BLS over 2022-2032 decade amounts to 2.1 million or around 210K per annum. This pales in comparison to the pace of nearly 1 million observed over the past year.

With disinflation on track, Fed easing should help stem recession risks and the Us economy will continue to enjoy support from various government programs to boost investments. This is unlikely to change with the upcoming presidential elections, moreover, although the risk of new frictions on the international front could mark a headwind for the US economy. Ultimately, it’s the health of investment spending and R&D investment that will determine the long-term growth potential. US productivity gains have certainly been impressive, question now is whether they will prove sustainable.