US Economic Snapshot

Heading into the summer months, IBKR’s Senior Economist Jose Torres assigns a one-in-three chance of US recession and discusses the current health of the American consumer and labor market.

Summary – IBKR Podcasts Ep. 162

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson  

Welcome to today’s episode. This is Andrew Wilkinson for Interactive Brokers and I’m joined by Senior Economist, Jose Torres. Welcome, Jose.  

Jose Torres  

Hi, Andrew, great to be here.  

Andrew Wilkinson 

Good man. We thought we’d discussed the US economy as we’re heading into the summer months and we’re going to do that from a few different angles. So let’s start off with the consumer. Interest rates have plateaued, Jose. And I guess the question is, whether interest rates have really bitten. How is the consumer faring at this point?  

Jose Torres 

Well, the consumer is slowing down. We’re seeing economic growth from the fourth quarter achieve a rate above 3% to slow down to 1.6% as of the first quarter. Consumer spending overall continues to be strong. We are seeing households become a little erratic, however, with their spending. We’re seeing fluctuations on a month over month basis. Some economists are calling quits on the consumer thinking that we’re going into a downturn.  

However, I’m a little more constructive. I think that the consumer is going to hang in here. They have access to labor. Job openings are quite elevated. Job growth is still positive. Cyclical industries aren’t hiring strongly, but they’re not firing either. Initial and continuing unemployment claims remain very well contained. There are some concerns from the National Federation of Independent Business surveys that small and medium sized businesses are starting to see employment growth starting to soften. Folks aren’t hiring as much as they did last year.  

We’re also seeing from a consumer spending perspective, that savings are really hitting the basement. Consumers are spending almost all their money. They are being pressured by elevated prices, lofty interest rates and reduced credit availability on the earnings calls. We’re hearing consumers having to make some tough choices. Pairing back on a lot of those discretionary categories.  

We heard from target, we heard from Starbucks. Walmart, meanwhile gaining market share, even trying to become competitive on the e-commerce front versus Amazon. Those are developments that point to a consumer that’s quite conscious of prices and looking to budget and save as much as possible.  

Final point: credit delinquencies on the consumer are starting to tick up, particularly auto and credit cards. Historically, that has proceeded a downturn and folks are waiting for the dominoes to fall. However, the rate sensitivity of this economy is much less than in the past when high interest rates really constrain the economic activity. You know, we’ve had high interest rates for a while, tight monetary policy, and economic growth of 1.6% is still quite impressive.  

Andrew Wilkinson 

So, Jose, we’ve seen the employment gains in the nonfarm payroll report softening a little, but how would you currently characterize the labour market?  

Jose Torres 

So, the labor market is at a juncture where companies aren’t looking to expand their head-counts strongly, but they’re also not laying folks off. And part of that, Andrew, is labor hoarding.  

Corporates are a little paranoid, a little concerned over what happened in the pandemic. There was a lot of Labor turnover. Labor quality is also emerged as its theme in the last half a decade or so from around 2016, 2017. So companies really want to maintain the labor that they have. Because, they are a little fearful that if they start to lose that high quality labor, acquiring new workers, training them, you know, is a huge investment and not guaranteed. Quite risky.  

Companies are in the position where they want to maintain those head-counts and if economic growth starts to reaccelerate, they don’t want to be stuck in a position where they don’t have the roster depth to take advantage of that accelerating economic growth. They don’t want to start laying folks off, reducing head-counts and then revenue prospects all of a sudden start to levitate. And that those companies can’t produce the goods and services that they’d like, right? That’s sort of how I’m seeing the labor market today.  

Andrew Wilkinson 

One area that we have seen soften under the weight of higher mortgage rates as real estate. How is the real estate market doing? 

Jose Torres 

Well, the real estate market is quite bifurcated. We’re seeing discounts occur in the new home segment, which is comprising a larger share of transactions. However, just this week we got data on existing home sales pointing to inventory starting to climb.  

In the beginning of the year, sellers – prospective sellers rather – were quite optimistic. They heard that the Fed was going to cut rates seven times. They saw mortgages at around 6.6, 6.7%.  

However, inflation in the first quarter and then April resurged from the disinflationary progress that we saw in fourth quarter of last year and that really has brought down rate cut expectations from 7 at the beginning of the year to just 1 today. 

Now, the real estate market is now having to deal with 7% mortgage rates, right? So, but those sellers in January that were motivated to sell this year are growing impatient and we’re starting to see the inventory tick up against the backdrop of a new home market where home builders have strong connections and financing networks with lenders so they can offer some rate concessions to buyers, that existing home sellers – existing prospective home sellers rather – can’t offer. So, we’re sort of seeing this competing framework between the new home market and the existing home market.  

However, and final point here: residential real estate prices are at all time highs. However, new homes are not at all time highs. They’re down significantly from their highs a few years back. 

Andrew Wilkinson 

Now, the manufacturing sector often referred to as being at the heart of the US economy- what did you take away from industrial activity at this point?  

Jose Torres 

We’re seeing quite the rebound on the global basis and part of that is that in the pandemic – particularly years 2020 and 2021 – folks and corporates like really splurged on goods and equipment. There was a lot of demands for goods, not much appetite for services, of course, because most of us were locked down.  

So, a lot of the manufacturing demand was front loaded in those years. 2022 went on. 2023, went on. Folks already had their automobile. They had their new furniture. They had their new telephone. They had those durable goods. They didn’t need to replenish them in 2022 and 2023. Against that backdrop, ‘22 and ‘23 also featured lofty interest rates. A lot of these durable goods, consumers and corporates alike rely on financing to acquire them. So, you had those two factors really hamper manufacturing demand in ‘22 and ‘23.  

Now we’re in 2024. It’s time to replenish some of those old goods. Folks spent so much money on services, there seems to be more of an appetite for goods today. We saw manufacturing PMI’s start to reach expansion territory in some recent months, with some differences between ISM and S&P Global. The price of copper reached all time highs just this week as well. Also seeing that in the commodity space across metals with gold and silver is is not far behind as well. And, those factors point to a manufacturing rebound.  

Finally, fiscal spending has been quite buoyant. In fact, we’re running deficits as if we are in a deep recession and we don’t really need to do that. But the Inflation Reduction Act and some of the programs passed by President Biden and Congress are supporting manufacturing investment. However, manufacturing employment still has yet to benefit from those big investments, and some of those companies are Taiwan Semiconductor, building a huge facility in Arizona. And then we have Micron technology building huge facilities up in the Syracuse connect to the areas up in upstate New York.  

And so, the reasons why those companies are doing that is partially because of President Biden’s policies to incentivize that manufacturing investment. And again, we’re just repeating, it hasn’t benefited in manufacturing head-counts yet. We hope they will. And also, the reason they’re doing that is globalization is shifting to regionalization. The experience of the pandemic compelling companies to focus more on reliability rather than profitability. Mexico is its top importer for the United States rather than China. It is a more expensive route, it’s more expensive source, but it’s more reliable and those are some of the trade-offs we’re seeing today in manufacturing.  

Andrew Wilkinson 

So compared to at the start of 2024, what’s your position on the risk of US recession as we head into the Memorial Day weekend, which typically signals the beginning of summer?  

Jose Torres 

Sure. So, I think that the odds are higher now than they were in the beginning of the year. In the beginning of the year, I had them at around 20%. Today, they’re between 30-35%, almost 1/3 of a chance. And the reason why it’s not a 50% is because the consumer in America just has a particularly fierce appetite to spend.  

You know, there’s a saying goes that when Americans are happy, we spend. And, when we’re upset, we spend more. So, despite sentiment being down and savings being near the basement, you know, the consumer just comes out and we’re hearing that from corporate earnings. We have equity indices in the US here near all time highs, excluding the Russell 2000.  

And, corporate balance sheets are strong. They’re going to keep their rosters. Consumers will have money. There’s not that much of a propensity to save. Durable goods out of reach for many households. Homes, unaffordable for many consumers. So, that propensity to save historically where folks are saving for down payment – saving to purchase these durable goods – there’s not that much of a desire to do that anymore, because they’re not realistic for some folks. And, that’s really pushing spending higher at the expense of savings. However, we’d probably rather have that overall than dealing with an economy that’s over saving, like how Japans dealt with historically, where folks were saving too much and that failed to stimulate the economy. So, I think that’s gonna keep us out of a downturn.  

Andrew Wilkinson 

Jose Torres, Senior Economist with Interactive Brokers, thank you very much for joining me.  

Jose Torres 

My pleasure. I look forward to joining again soon. Hello to all, ladies and gentlemen.  

Andrew Wilkinson 

And to the audience. Thank you for joining us. And, if you enjoyed this podcast, please consider subscribing from wherever you download your podcasts from.  

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