Consensus sees the highest US growth rate since 1984. But this ignores the unprecedented boom in US consumer goods spending…
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Summary
- Consensus sees the highest US growth rate since 1984. But this ignores the unprecedented boom in US consumer goods spending.
- Other countries have not seen a similar boom as their governments did not boost incomes as much as the US did.
- The US boom has seen production jump, the US trade balance worsen and goods prices surge.
- With government benefits ending, goods consumption will likely fall back to trend, which provides downside risks to both growth and inflation.
- This makes us cautious towards both equities and bond yields.
US growth expectations are elevated. The consensus for 2021 US GDP growth is at 6.6% – the highest rate since 1984. At the start of the year, consensus was for 3.9% growth for 2021 (Chart 1). Moreover, the current quarter is now expected to see annualized growth of 10%, followed by 7% and 5% for the remaining quarters of 2021 (Chart 2). These expectations are likely too high – not least because US goods consumption could end up significantly disappointing.
It Is All About Sectors
The COVID lockdowns were unique: they impacted the services sector more than the goods sector. With re-openings in full swing, services consumption is steadily returning to trend (Chart 3). However, US goods consumption never meaningfully declined – it actually surged soon after the pandemic started and is now at the highest deviation to trend on record (Charts 4 and 5). Another expression of this is that the volume of retail sales over the past year equates to the total retail sales seen during the entire post-GFC and post-dot-com economic expansions (Chart 6). That is, the same as during 7-10 years of previous expansions. So unlike the services sector, which saw a recession, the consumer goods sector saw an unprecedented boom around COVID.
Comparison With Other Countries
This was a uniquely American affair. Comparing real retail sales across the major economies – whether China, the UK or euro area – finds goods consumption only returning to trend (Charts 7-10). It was the unprecedented US government transfers to households that led to the US surge (Chart 11). These transfers saw US personal incomes increase sharply, rather than decrease, during the 2020 downturn. Other countries, meanwhile, used furlough schemes, which saw personal incomes remain in line with previous trends (Chart 12).
One consequence of the US consumption binge was a large deterioration in the US trade balance (Chart 13). The deterioration suggests that the US consumer was the big engine for global consumer goods production. This has likely helped keep global PMIs at elevated levels. Moreover, it has seen US goods consumer prices surge too (Chart 14).
The Outlook Is Poor
What goes up must come down. Such large deviations from trend are typically transitory (Chart 5). More importantly, US government transfers are ending, which will remove a big support for goods consumption (Chart 15). Then, with lockdown measures lifting, consumers will switch some of their spending to services and away from goods. Finally, consumer surveys suggest households are finding buying conditions for consumer goods increasingly difficult.
A complete reversion to trend would see US goods consumption 10% below end-Q1 levels. So even a partial reversion could see sequential periods of negative consumer goods growth – that is, a consumer goods recession. Overall US consumption may remain positive as services consumption could offset these declines. But even so, the current forecasts of a cumulative gain in overall consumption of over 5% from Q2 to the end of the year appear too high. A complete reversion to trend could see it closer to 2%.
The risks, then, to US growth forecasts for the balance of the year are to the downside. Assumptions of continued high levels of production and inflation could also be overstated. In such an environment, both equities and bond yields may struggle to make large gains.