[Looking at the United States] Luo Zhiheng: Six major factors inhibit the momentum of U.S. consumption in the second half of the year. Since the outbreak of the epidemic, the United States' unconventional fiscal and monetary policies have fueled strong consumer demand and also sp

Chief Economist and Research Institute Director of Yuekai Securities, Luo Zhiheng

[Looking at the United States] Luo Zhiheng: Six major factors inhibit the momentum of U.S. consumption in the second half of the year

China News Service, July 7th: The United States is founded on consumption, and consumption accounts for The proportion of GDP exceeds 70%. Since the outbreak of the epidemic, the United States' unconventional fiscal and monetary policies have fueled strong consumer demand and also spawned historic inflation. Under the influence of continued high inflation, the U.S. consumer confidence index reached a record low.

At present, the world's once-in-40-year inflation cycle and interest rate hike cycle are intertwined. In the second half of the year, U.S. consumption will face six major constraints, which may intensify the risk of U.S. economic recession.

First, high inflation has led to a decline in residents’ actual purchasing power. In May, U.S. CPI hit a record high year-on-year, with goods and services all rising broadly. Food, energy, core commodities, and core services drove CPI by 1.4, 2.6, 1.9, and 3.0 percentage points respectively year-on-year. Although U.S. personal consumption expenditures still maintain a high nominal year-on-year growth of more than 8%, the actual year-on-year growth rate has dropped to 2%, the pre-epidemic level. In addition, consumers with high inflation expectations may take the initiative to cut spending and reduce non-essential consumption. University of Michigan consumer survey data shows that in June 2022, consumers' inflation expectations for the next year are still above 5%.

The second is The Federal Reserve's interest rate hike has caused the cost of consumer loans to rise, impacting credit card consumption and automobile consumption. After the Federal Reserve raised interest rates, financial conditions tightened significantly, and the negative impact on consumption gradually became apparent. At the end of the first quarter of 2022, the proportion of overdue residential car loans and credit cards has increased slightly, but it is still at a relatively low level in history. Policy interest rates will lead to a rapid increase in residents' credit costs. First, credit card consumer credit with higher interest rates will decrease, and residents' daily consumption will shrink. Second, interest payment pressure will first hit people with weak credit qualifications, triggering a chain of car loan defaults and affecting automobiles. Sale.

Third, the sharp decline in US stocks has triggered a negative wealth effect, inhibiting residents' consumption ability 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, and stock assets account for 40% of financial assets. Since the epidemic, the wealth effect brought by the bull market in U.S. stocks has been an important driving force for residents' consumption.

In the first half of this year, U.S. stocks plummeted, recording the worst half-year performance since 1970. In the first quarter of 2022, the scale of stock assets held directly by U.S. residents and indirectly held through funds shrank by 5.3% and 7.3%, respectively, which was equivalent to the decline in the U.S. stock index during the same period. The ratio of financial assets held by residents to disposable income dropped sharply by more than 12 percentage points. The current impact of the U.S. stock market on residents' balance sheets is far less than during the financial crisis. However, if profit expectations and valuations of the U.S. stock market continue to be under pressure in the second half of the year, and the market bottoms out again, the inhibitory effect on residents' consumption demand will be further apparent.

Fourth, the labor market is cooling, and the support for consumption from the income side of residents will weaken. 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. However, this year's Federal Reserve continuous interest rate anti-inflation may come at the expense of slowing economic growth and rising unemployment.

Since May, many large American technology companies, such as Netflix, Twitter, Tesla, have successively laid off employees and frozen recruitment plans, and the demand for labor in the US technology service industry has taken the lead in cooling down. In the second half of the year, if unemployment in the technology industry spreads to more industries, it may reverse the supply and demand pattern of the overall labor market. Residents' wage income will slow down, which will increase downward pressure on consumption. In May, the year-on-year growth rate of average non-farm employment in the United States fell for two consecutive months, 0.4 percentage points slower than the March high.

Fifth, fiscal subsidies will be reduced and residents’ disposable income will return to normal. After the Biden administration came to power in 2021, it launched a U.S. bailout plan to support the recovery of the cash flow statement of the household sector through the payment of cash subsidies, unemployment benefits, loan extensions and other means. The personal savings rate of U.S. residents has exceeded 30%.However, since the second half of 2021, fiscal transfer payments have gradually faded out, residents' income growth has returned to normal, and expenditure growth has been faster than disposable income growth. In April 2022, residents' personal savings rate has dropped to 5.2%, which is even lower than the pre-epidemic level. .

Sixth, after the epidemic subsides, the demand for home-related products decreases. At the beginning of the outbreak, the epidemic restricted service consumption scenarios, but the tightening of fiscal and monetary policies in the United States stimulated residents' consumption of goods to recover first, especially the surge in demand for durable goods related to working from home. The proportion of personal goods consumption among U.S. residents rose to a maximum of 35.9% from 30.8% before the epidemic. However, since the second quarter of 2021, U.S. commodity consumption has gradually declined, and under the influence of a high base, commodity consumption has actually fallen into a negative growth range year-on-year.

Overall, looking forward to the second half of the year, the momentum of U.S. consumption may gradually weaken, and its contribution to GDP growth will also weaken. However, the internal structural adjustment of consumption still has a certain degree of resilience. The risk worthy of attention is that if the United States continues to have high inflation and triggers the Federal Reserve to raise interest rates too quickly, while suppressing residents' spending power and willingness to spend, resulting in actual negative year-on-year growth in personal consumption expenditures, it may drag the U.S. economy into recession.

(Author Luo Zhiheng, Chief Economist and Dean of the Research Institute of Guangdong Securities)