U.S. Macro Outlook
— updated 8.5.24—
Weak signs, at pressing times…
The Nikkei 225, Japan’s hallmark stock market index, has just hit a 40-year low. This sudden decline is emblematic of a broader global market downturn. In the United States, a flimsy jobs report, slow economic growth, and decreasing consumer purchasing power (see earlier entry) have set a rather troublesome macroeconomic scene.
The triumphs of the MAG 7 throughout the better part of 2024 have seemingly been corrected, as Nasdaq indexes follow suit with their peers. These triumphs were largely achieved because of widespread hype around generative AI development: over 50% of VC investment in Q1 ’24 went to AI/ML startups. Whereas data quality and algorithmic capabilities have largely remained unchanged, AI compute has grown tremendously. This surge in compute is reflected by Nvidia’s historic run and mass sale of H100-powered GPU clusters.
But the market has priced in the hype, and the global macroeconomic outlook looks bleak. Now, all eyes are on the Federal Reserve and its Chair Jerome Powell for some long overdue interest rate cuts.
All this, not to mention the dire state of the American real estate market.
I keep this analysis brief because it isn’t novel or contrarian. But it is real and deserves some attention, especially from the current Biden-Harris administration.
With the presidential election just months away, and the odds seemingly rebalancing in VP Kamala Harris’s favor, it appears that economic recourse is imminent.
Consumer Savings -> Implication on GDP -> Revenues vs. Costs -> Poor Economic Outlook
In May, the San Fransisco Fed published data showing that the savings Americans obtained throughout the COVID-19 period were depleted. These “excess savings” were no more.
This data is generally alarming. American spending emanates from two sources: savings and credit. If savings are depleted, consumers are more likely to purchase via credit, adding to the record $1.1 trillion aggregate credit card balance reported in Feb. 2024. However, it is even more alarming when paired with some context.
Spending by consumers accounts for roughly 70% of GDP. To put that into perspective, World GDP is constituted by about 15% consumer spending.
Now, zoom out to GDP on the whole. GDP growth in Q1 ’24 was 1.3% on an annualized basis. Think of that as the growth rates of revenues in the country.
How, then, are costs growing relative to revenue?
Last week, the Labor Department reported that the CPI held at 3.3%, just under the expected 3.4%. This figure, edging closer to the Fed’s target 2% and minuscule compared to the 9.1% experienced in June ’22, along with U.S. unemployment data have garnered some global optimism about America’s economic health.
But, amid concerns of U.S. debt financing, unknowns surrounding the upcoming presidential election, and signs of a weakening labor market, it is hard to say that the U.S. economic outlook is strong.
Interest rates are another cost. With the Fed not looking to cut rates until inflation yields further, the cost of borrowing remains high making investment lethargic.
The bottom line is that there just isn’t enough growth relative to persisting costs.
Another tidbit regards the inverted U.S. Treasury yield curve, which has been inverted for the longest period on record. Historically, the normalization of these yield curves has resulted in a recession. As rates normalize and treasury yields get priced accordingly, a looming recession remains a threat.