Cracks Appear in U.S. Economic Foundation

by | Jun 22, 2024 | Banks, Biden Administration, Blog Articles, China, Covid-19, Economy, Finance, Inflation, Iran, Politics, USA

Gross domestic product is the yardstick of economic activity. U.S. GDP growth has been decelerating for three quarters. The revised first quarter figures showed only 1.3 percent real (i.e., after inflation) GDP growth. Expectations for the remainder of the year are not much better, with a forecast of 2.1 percent GDP growth for 2024. While this is somewhat better than the anemic growth rates of Europe, where countries like Germany have been in outright recession, it is well below healthy growth rates for the U.S., which should be closer to three percent. And it is well below the growth rates of our primary geopolitical competitors such as China, with projected 2024 growth of 4.6 percent, Iran (5.3 percent) and Russia (2.7 percent).

Inflation came down slightly in May, with the Consumer Price Index growing by an additional 3.3 percent (compared with 3.4 percent in April). Economists and Biden administration officials rejoice because prices are growing less fast, but American households suffer and groan. This is understandable when the price of groceries and other household items are over twenty percent higher than they were three years ago, and aren’t coming down anytime soon. Energy, transportation, and shelter cost increases since 2020 are even worse, and this is the lived reality of most Americans.

As a result, the American consumer, which traditionally has been the engine of U.S. economic growth, is running out of steam. Households have been maxing out credit card and other debt, and depleting savings to cover expenses.

Other measures of economic health are also sending warning signs. The ISM manufacturing index fell to 48.7 in May 2024 from 49.2 in April, disappointing a forecast for 49.6. This means there has been a contraction of manufacturing activity reflecting soft demand. Production slowed and new orders declined. The index remains below pre-2020 levels, when lockdowns threw the U.S. economy into disarray.

The Biden administration continues to argue that the employment market is strong, evidenced by statistics showing positive job creation. Even still, most of these jobs—and the official employment numbers that accompany them—reflect lower paying part-time jobs. Over the past year 1.1 million full-time jobs have been lost, replaced by 1.5 million part-time jobs. Who wins in that environment? Immigration—most of it illegal—has been the source of nominal job growth at the lower end of the market. But this has come at the cost of native workers. U.S. unemployment, while still below levels that would historically suggest recession, is rising. May’s 4.0 percent figure is up 17.6 percent from April 2023 and above 2019 levels. Real (i.e., after inflation) wages, as measured by median usual weekly earnings, are flat vs. pre-pandemic levels. In other words, the working and middle classes are barely treading water, if not being swept further and further away from a stable financial shore.

The banking system, which has to date managed to avoid a widening crisis from the bank failures of 2023, cut lending in the first quarter of 2024, indicating concerns about the health of the economy and their own balance sheets. Unrealized losses on securities held by banks remain above $500 billion, and the FDIC increased the number of depository institutions on its Problem Banks list from 52 to 63 in the first quarter, indicating more trouble ahead.

The equity markets reflect none of this. Going from one all-time high to the next, the markets imply that things can only get better. For example, the total U.S. market capitalization to GDP ratio, recently at 188 percent, has since 2020 been at the highest level ever recorded. Whether such levels are justified by innovation in artificial intelligence and other technologies is debatable. More likely seems a combination of money supply expansion, excess liquidity, asset price inflation, and a euphoric optimism which hopes against hope that the party doesn’t stop.

The disconnect between Wall Street and Main Street can’t continue forever. Eventually either the economy must grow into today’s lofty valuations, or equity, real estate, and other market valuations will have to reset.

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