There are some interesting patterns and trends in US data: so I do ask myself, are we at the peak of the current cycle, are we as far as debt and low interest rates can take us?
US income growth has long been acknowledged to have weakened considerably yet recent data shows that the trend has indeed been weaker than first thought. Note the following chart showing pre and post revisions to chained per capita personal disposable income:
Historically real per capita growth in personal disposable income has been trending down and the current cycle looks to be the weakest of all:
And non revolving credit (car and student loans) to personal disposable income (to May 2015) is also at historical highs, implying in my opinion a higher degree of consumer purchase stress and consequently greater risks to GDP! This data relationship is significant.
Personal consumption expenditures as a % of personal disposable income also remain at elevated levels. You have to ask yourself, where is the growth going to come from? Not income and hopefully not more debt and with elevated PCE certainly not investment expenditure. And it is not a simple question of consuming less and saving/investing more as the two are more or less joined at the hip.
And a leg up in growth growth does not look as if it is going to come from population growth, a key secular dynamic, which continues to weigh:
And personal current transfer receipts remain elevated, a further sign of weakness at the economic core and other imbalances (note increasing income inequality that begets increased transfer receipts):
And savings rates remain low as implied by weak income growth and elevated PCE as a % of GDP:
And some take-aways from the recent GDP report can also be added: GDP growth has been much slower than previously thought. In the following chart I have extended the old Q1 real GDP level to Q2 (red line) to show that you could say that the US has been in a statistical recession since Q4 2014. There is something to be said for delivering the bad news in the past!
One of my continuing concerns has been the ceiling on per capita real personal consumption growth:
This is certainly not the cause of weak growth, but it is its output: growth in consumption hit a barrier some way back and only rising debt and reduced saving seems to have allayed an alternative outcome. The relationship is shown below as nominal GDP wide (non per capita):
Anybody setting capital market expectations for asset liability modelling and management should be concerned by the squeeze!
In one respect the importance of consumption to growth has continued to rise: the chart bellow illustrates the increased sensitivity of US growth to demand and a demand shock:
Interestingly, as an aside, consumer expenditures have actually stalled as a % of GDP since the late 1990s: it is healthcare expenditure that has generated the increase. Further structural imbalances and hence stressors come to mind here.
While concerns over investment growth are well voiced I note that equipment expenditure has weakened further of late:
But health care expenditure remains important:
As do inventories which continue to expose GDP to a growth shock:
And nominal export data has continued to show structural weakness, reflective of a broader global shock:
And we can see the growth cycle possibly peaking at much lower than historical levels:
So I do ask myself, are we at the peak of the current cycle, are we as far as debt and low interest rates can take us?
When we get consumer credit data for the second quarter I will also be able to update the following chart:
We remain on the borders of recessionary territory, highly exposed to financial and economic shocks.
And a quick look at charts from the recent manufacturing new order data release:
The annual growth based on PPI adjusted and smoothed 6 monthly data shows considerable weakness although nowhere near the nominal unadjusted data.
The above 2 charts show that while growth has indeed slowed considerably post last summer’s surge the decline has stabilised. But while it has indeed stabilised we have not seen the type of rebound you would expect in a healthy growing economy.
The big question is whether what we see in the data is a growth shock (a la China and global trade) or just a mere adjustment to excessive order growth during the summer of 2014. It is looking increasingly like both an adjustment and an adjustment to much slower growth dynamics.
Relative strength still resides in consumer durables, “notably” motor vehicles and parts:
And I emphasise the word notably….the present motor vehicle and parts order cycle is historically significant and an outsized source of growth for the economy…note low interest rates.