Bilal’s Macroscope: 5 Things You Didn’t Know About the US Economy
- By Bilal Hafeez
- 3 min read
For all the focus on the US business cycle, and the possibility of a recession, the clearest characterization of the economy is that it is at trend.
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1. Boring GDP! It Is at Trend
For all the focus on the US business cycle, and the possibility of a recession, the clearest characterization of the economy is that it is at trend. The last GDP print (Q2) has growth at 2.5% (y/y). And guess what the average growth rate of the US has been since 1980? 2.6%. So, after the growth collapse in 2020 and sharp rebound in 2021, the US economy is settling down to trend growth. Moreover, nowcast estimates for Q3 – whether Atlanta Fed (4.9%) or NY Fed (2.3%) – have it around trend too.
2. More Workers Needed
The labour market has been a focal point for investors. Many have cited the declining pace of payroll growth as a sign of economic weakness. But stepping back, something else is going on. If we look at payroll levels by sector relative to their pre-COVID trends, we find some sectors have over-hired, while others have more scope to hire.
Specifically, we find that the level of payrolls in transport, warehousing, tech and federal government are notably higher than the pre-COVID trend would suggest (Chart 2). These areas could therefore see layoffs.
However, large swathes of the economy have yet to see payrolls return to trend. Nursing, arts, accommodation, food services and admin services are all 10% or more below trend. This suggests the COVID-affected sectors have more scope to hire, so the labour market may be stronger than recent payroll growth would suggest.
3. Factory Building in Full Swing
Many thought that work-from-home would see the end of office building and so a collapse in non-residential structures investing. However, this year we have seen a surge in structures investing, which in turn has boosted US growth (Chart 3). And rather than office buildings, it seems factory building is behind this jump. So it appears the onshoring story and the US fiscal packages are now materializing in economic data.
4. Auto Sector Boom
Another sector seeing a mini boom is autos. After the wild post-COVID swings, we are now seeing auto sales growth at around 13% (y/y) and production up 10% (Chart 4). This has come even with higher US interest rates. This likely reflects higher household income growth and more new cars becoming available after earlier supply-side issues. Given the historic interest rate sensitivity of this sector, autos will be a key cyclical indicator to watch for 2024.
5. The Fed Does Not Care About Its 2% Target
The Fed likes to talk tough on inflation and its commitment to a 2% target, but its actions speak louder than words. At the start of 2022, the Fed erred on the side of expecting a benign outcome on inflation. It projected core PCE to fall from 4.2% to 2.2%. Inflation ended up at 4.8% and forced the Fed to hike to 4.5% over 2022.
Then at the start of 2023, the Fed did not even bother to say they could bring inflation down to its 2% target. Instead, it forecast 3.5% by end-2023, which is likely to materialise. But to get to even that level, the Fed must hike by more than expected, likely to 5.75% (assuming a November hike).
Now next week’s Fed meeting will have the latest projections for 2024, but the last projections showed that the Fed once again does not expect inflation to reach its 2% target; rather it expects 2.6%. And to confirm the Fed’s lack of commitment to 2%, they expect to cut rates in 2024. Better to preserve growth than go the final mile and bring inflation down to 2%.