Luo Zhiheng, Chief Economist of Yuekai Securities and Dean of the Research Institute
[Insightful View of the United States] Luo Zhiheng: Six major factors inhibit the consumption momentum of the United States in the second half of the year
China News Service, July 7th. The United States is founded on consumption, and consumption accounts for more than 70% of the US GDP.
Since the outbreak of the epidemic, the unconventional fiscal and monetary policies of the United States have contributed to the strong consumer demand of residents and also spawned historic inflation.
Under the influence of persistently high inflation, the US consumer confidence index hit a record low on record.
At present, the global inflation cycle and interest rate hike cycle are intertwined. In the second half of the year, U.S. consumption is faced with six major factors, which may aggravate the risk of recession in the U.S. economy.
First, high inflation has led to a decline in the real purchasing power of residents.
In May, the U.S. CPI hit another record high year-on-year, with goods and services rising broadly. Food, energy, core commodities, and core services boosted the CPI by 1.4, 2.6, 1.9, and 3.0 percentage points year-on-year, respectively.
Although the nominal year-on-year growth of personal consumption expenditures in the United States still maintains a high growth rate of more than 8%, the actual year-on-year growth rate has fallen to the pre-pandemic level of 2%.
In addition, consumer inflation expectations are high, or will actively reduce spending and reduce non-essential consumption.
In June 2022, consumer inflation expectations for the year ahead remained above 5%, according to the University of Michigan Consumer Survey.
Second, the Fed's interest rate hike has increased the cost of consumer loans, impacting credit card consumption and auto consumption.
After the Fed raised interest rates, financial conditions have tightened significantly, and the negative impact on consumption has gradually emerged.
At the end of the first quarter of 2022, the proportion of residents' auto loans and overdue credit cards has increased slightly, but it is still at a relatively low level in history.
Policy interest rates will lead to a rapid rise in the cost of household credit. First, credit card consumer credit with higher interest rates will decrease, and residents’ daily consumption will shrink. Second, interest payment pressure will first impact people with weak credit qualifications, triggering chain defaults on auto loans and impacting auto loans. Sales.
Third, the sharp drop in U.S. stocks triggered a negative wealth effect, inhibiting residents' spending power and willingness.
U.S. stocks are an important asset in the wealth of U.S. residents. Financial assets account for more than two-thirds of the total assets of U.S. residents, while stocks account for 40% of financial assets.
Since the epidemic, the wealth effect brought about by the bull market in the US stock market has been an important driving force for residents' consumption.
In the first half of this year, U.S. stocks tumbled for their worst half-year performance since 1970.
In the first quarter of 2022, the scale of stock assets directly held by US residents and indirectly held through funds shrank by 5.3% and 7.3%, which is comparable to the decline in the US stock index over the same period.
The ratio of financial assets held by residents to disposable income dropped by more than 12 percentage points.
The current impact of U.S. stocks on residents’ balance sheets is far less than that during the financial crisis. However, in the second half of the year, if earnings expectations and valuations in the U.S. stock market continue to be under pressure, and the market bottoms out again, the inhibitory effect on household consumption demand will be further revealed.
Fourth, the labor market is cooling down, and the support of residents' income to consumption will be weakened.
Since the fourth quarter of last year, the U.S. unemployment rate has been at a low level, the job vacancy rate and wage growth have risen to high levels, and the labor market has reached a tight balance.
But this year the Federal Reserve has raised interest rates continuously to fight inflation, which may come at the cost of slower economic growth and rising unemployment.
Since May, Netflix, Twitter, Tesla and many other large US technology companies have successively laid off and frozen recruitment plans, and the labor demand of the US technology service industry has taken the lead in cooling down.
In the second half of the year, if the unemployment in the technology industry spreads to more industries, it may reverse the supply and demand pattern of the overall labor market, and the wage income of residents will slow down, which will increase the downward pressure on consumption.
The year-on-year growth rate of U.S. nonfarm payrolls fell for two consecutive months in May, easing 0.4 percentage points from the March high.
Fifth, financial subsidies have declined, and residents' disposable income has returned to normal.
After the Biden administration takes office in 2021, it will launch a US bailout plan, which will support the recovery of the cash flow statement of the household sector by issuing cash subsidies, unemployment benefits, loan deferrals and other means. The personal savings rate of US residents has exceeded 30% at the highest.
However, since the second half of 2021, the fiscal transfer payment has gradually faded out, the growth of household income has returned to normal, and the growth of expenditure is faster than the growth of disposable income. In April 2022, the personal savings rate of households has dropped all the way to 5.2%, even lower than the pre-pandemic center. .
Sixth, after the epidemic subsided, the demand for home-related commodities decreased.
At the beginning of the outbreak, the epidemic restricted the service consumption scene, and the US fiscal and monetary policy increased, which stimulated residents' commodity consumption to recover first, especially the demand for durable goods related to home office surged.
The proportion of U.S. residents’ personal goods consumption rose from 30.8% before the epidemic to 35.9%.
However, since the second quarter of 2021, U.S. commodity consumption has gradually declined, and under the influence of the high base, commodity consumption has actually fallen to the negative growth range year-on-year.
In general, looking into the second half of the year, the momentum of US consumption may gradually weaken, and the pull of GDP growth will also weaken, but the internal structural adjustment of consumption will still be resilient to a certain extent.
The risk that deserves attention is that if the U.S. continues to have high inflation and triggers the Fed to raise interest rates too quickly, while suppressing residents’ spending power and willingness to spend, the actual year-on-year negative growth in personal consumption expenditures may drag the U.S. economy into recession.
(Author Luo Zhiheng, Chief Economist of Yuekai Securities, Dean of the Research Institute)