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The United States is founded on consumption, and consumption accounts for more than 70% of the United States GDP. Since the outbreak of the epidemic, the United States' unconventional fiscal and monetary policies have stimulated strong consumer demand, but also spawned historic inflation. At present, the world's once-in-40-year inflation cycle and interest rate hike cycle are intertwined, and the market is worried that weakening consumption may drive the U.S. economy into recession. What is the potential for U.S. consumption in the second half of the year? What potential supports and challenges are faced? What impact will it have?
1. Six major factors inhibiting U.S. consumption momentum
Under the influence of continued high inflation, the U.S. consumer confidence index hit a record low. 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.
. High inflation leads to a decrease in the actual purchasing power of residents. Prices of goods and services in the United States have risen broadly, and residents' real purchasing power has declined. Moreover, consumers with high inflation expectations may take the initiative to cut spending and reduce non-essential consumption. 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.
. The Federal Reserve’s interest rate hikes have increased the cost of consumer loans. After the Federal Reserve raised interest rates, financial conditions tightened significantly and residents' credit costs rose rapidly, which in turn impacted automobile consumption and credit card consumption.
3, The sharp decline in US stocks triggered a negative wealth effect. In the first quarter of 2022, the ratio of financial assets held by U.S. residents to disposable income dropped by more than 12 percentage points. If the U.S. stock market bottoms out again in the second half of the year, it will further inhibit residents' spending power and willingness.
4. The labor market is cooling down, and the growth of residents’ wage income may slow down. This year the Federal Reserve has continuously raised interest rates to combat inflation, which may come at the expense of rising unemployment. In the second half of the year, if the labor market cools down and residents' wage income slows down, downward pressure on consumption will increase.
5. Financial subsidies will be reduced, and residents’ disposable income will return to normal. Since the second half of 2021, fiscal transfer payments have gradually faded out, and residents' disposable income has grown slower than expenditure. In April 2022, residents' personal savings rate has dropped to 5.2%, which is lower than the pre-epidemic center.
6. After the epidemic subsides, the demand for home-related products will decrease. After the proportion of personal commodity consumption among U.S. residents reached a high in March 2021, commodity consumption gradually declined, and under the influence of the high base, commodity consumption has actually fallen to negative growth year-on-year.
| 2. U.S. consumption will decline as a whole, but changes in the consumption structure may provide some support
| . The rebound in service consumption will offset the decline in commodity consumption. This year, many places in the United States have relaxed epidemic prevention restrictions to promote social and economic recovery. This has led to a rapid recovery in offline service consumption, and the contribution of service consumption has significantly increased. Since March this year, the actual year-on-year pull of service consumption on PCE has been higher than the negative drag of commodity consumption. Service consumption will become the core driving force for consumption growth in the second half of the year.
. Within commodity consumption, the consumption of travel-related commodities offsets the consumption of home office commodities. From January to May this year, the year-on-year growth rate of retail sales of non-durable goods at gas stations, grocery stores, and clothing stores was much higher than the growth rate of overall retail sales. In contrast, the year-on-year growth rate of retail sales of furniture, home appliances, and electronic goods related to the stay-at-home economy during the epidemic period was the lowest. Looking forward, travel-related demand will promote the consumption of non-durable goods, which will partially offset the decline in home-related durable goods consumption.
3. Domestic production in the United States has resumed, imported consumer goods have decreased, and domestic substitution will have a positive impact on U.S. economic growth.
3. It is expected that U.S. consumption will actually fall back below pre-epidemic levels in the second half of the year, which will have an impact on U.S. consumer stocks and China's exports.
. Looking forward to the second half of the year, we believe that the momentum of U.S. consumption will gradually weaken, and its contribution to GDP growth will also decrease. will weaken, but the internal structural adjustment of consumption still has certain resilience.
First, U.S. consumption will weaken significantly month-on-month and may experience quarterly negative growth. Second, U.S. consumption will fall significantly in nominal terms year-on-year, but will still be higher than pre-epidemic levels due to high inflation. Third, U.S. consumption will actually fall below 2% year-on-year, which is lower than the pre-epidemic level.
. U.S. stocks: U.S. stocks and consumer stocks are generally under pressure due to interest rate hikes, but there are structural opportunities for the aviation sector driven by travel consumption.
3. China’s exports: Exports of clothing, automobiles and parts related to travel consumption may still have high room for growth.
Risk warning: The rebound of the epidemic has once again impacted U.S. production and consumption; the Federal Reserve continues to raise interest rates significantly, triggering an economic recession.
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1. Six major factors inhibiting U.S. consumption momentum in the second half of the year
The United States is founded on consumption, and consumption accounts for more than 70% of U.S. GDP. Since the outbreak of the epidemic, the United States' unconventional fiscal and monetary policies have fueled strong consumer demand and also spawned historic inflation. Affected by continued high inflation, the U.S. consumer confidence index hit a record low on record. The current historic 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.
. High inflation leads to a decrease in the actual purchasing power of residents. html 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 Federal Reserve’s interest rate hikes have increased the cost of consumer loans, 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 emerged. 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. The policy interest rate 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 auto loan defaults and impacting auto sales.
3. The sharp decline in U.S. 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 their 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 the U.S. stock market's profit expectations and valuations 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.
4. 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, the Federal Reserve's continuous interest rate hikes this year to combat inflation may come at the expense of slowing economic growth and rising unemployment. Since May, many large American technology companies such as Netflix, Twitter, and Tesla have successively laid off employees and frozen recruitment plans, and the demand for labor in the U.S. 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 U.S. non-farm employment average hourly earnings fell for two consecutive months, 0.4 percentage points slower than the March high.
5. Financial subsidies have been reduced, and residents’ disposable income has returned to normal. After the Biden administration came to power last year, it launched the U.S. bailout plan to support the recovery of the cash flow statement of the household sector through 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. .
6. After the epidemic subsides, the demand for home-related products will decrease. At the beginning of the outbreak, the epidemic restricted service consumption scenarios, but the increased fiscal and monetary policies of the United States stimulated residents' consumption of goods to take the lead in recovering, especially the surge in demand for durable goods related to home office. 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.
2. Changes in the consumption structure may provide certain support for U.S. consumption
Although the income and expenditure sides of U.S. residents have been impacted by inflation and interest rate increases, changes in the structure of U.S. consumption itself may reflect a certain degree of resilience. The first is the substitution effect of service consumption expenditure on commodity consumption expenditure; the second is the internal adjustment of commodity consumption, and the consumption of travel-related goods offsets the decline in consumption of other durable goods; the third is the recovery of domestic production in the United States, which also replaces imported consumer goods. It will support domestic consumption.
. The rebound in service consumption offsets the decline in commodity consumption
The current consumption structure in the United States is undergoing a change from the consumption of physical goods to the consumption of services. During the epidemic, due to restrictions on epidemic prevention measures and restricted consumption scenarios, the proportion of offline service consumption dropped significantly, while the proportion of home-related durable goods increased significantly. As global vaccination rates increase, developed economies such as the United States have significantly relaxed domestic epidemic prevention and international travel restrictions. This year, many places in the United States began to relax epidemic prevention restrictions to promote social and economic recovery, and the strictness index of epidemic prevention and control in the United States dropped to the lowest point since the epidemic. This has led to a rapid recovery in offline service consumption such as travel, and the contribution of service consumption has significantly increased. Especially since March, the actual year-on-year pull of service consumption on PCE has been higher than the negative drag of commodity consumption. Service consumption will become the core driving force for consumption growth in the second half of the year.
. Within commodity consumption, travel-related commodity consumption is offset by home office commodity consumption
Commodity consumption is divided into durable goods and non-durable goods consumption. Durable goods mainly include cars, furniture, home appliances and other goods with long service cycles, rather than non-durable goods. Durable goods mainly include food, energy supplies, clothing and other products that are updated frequently.
Judging from the nominal value of PCE statistics from the U.S. Bureau of Economic Analysis, consumer spending on non-durable goods has maintained a year-on-year growth rate of about 10%, while consumption of durable goods has experienced negative growth.
Judging from the retail sales statistics of the U.S. Census Bureau, from January to May this year, the year-on-year growth rate of retail sales of non-durable goods such as gas stations, grocery stores, and clothing stores was much higher than the growth rate of overall retail sales. Among them, gas station retail sales were pushed up by the record high retail prices of automobiles in the United States, while clothing retail sales reflected the recovery of travel consumption demand. In contrast, the retail sales of furniture, home appliances, and electronic goods related to the stay-at-home economy during the epidemic had the lowest year-on-year growth rate from January to May this year.
Looking forward, travel-related demand will continue to support non-durable goods consumption, which will partially offset the ebb of home-related durable goods consumption.
3. The recovery of domestic production in the United States and the reduction in demand for imported consumer goods will have a positive impact on the growth of the U.S. economy.
Since the epidemic, the recovery of domestic production in the United States has been slow, subject to supply chain and logistics bottlenecks. The United States mainly meets the surge in domestic demand through imports. commodity consumption demand. In the first quarter of this year, U.S. imports increased sharply due to the impact of the epidemic and high oil prices, which led to an expansion of the trade deficit and dragged down GDP growth from the previous quarter.
Looking forward, changes in the U.S. consumption structure will lead to a cooling of the demand for imported goods, and as U.S. domestic production continues to recover, some imported consumer goods will be replaced by domestic products, thus positively boosting GDP growth.
3. U.S. consumption is expected to fall back to pre-epidemic levels in the second half of the year, but there may still be structural opportunities for U.S. stocks and China's exports
. U.S. consumption will see a decline in year-on-year growth during the year, and may experience negative month-on-month growth
On the whole, the outlook is In the first half of the year, we believe that the momentum of U.S. consumption has gradually weakened and its contribution to GDP growth will also weaken, but the internal structural adjustment of consumption still has certain resilience.
First, U.S. consumption will weaken significantly month-on-month, and may experience quarterly negative growth.
Second, U.S. consumption will fall significantly year-on-year in nominal terms, but due to high inflation, it will still be higher than the pre-epidemic level.
Third, U.S. consumption will actually fall below 2% year-on-year, which is lower than the pre-epidemic level.
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 consume, resulting in actual negative year-on-year growth in personal consumption expenditures, it may drag the U.S. economy into recession.
. U.S. stocks: The consumer industry as a whole is under pressure, and travel consumption drives the aviation sector, which has structural opportunities.
In the second half of the year, amid tight liquidity and downward earnings expectations, the U.S. stock market as a whole is still under pressure, but travel consumption-related industries such as aviation or There are structural opportunities.
In June this year, the U.S. stock market has entered the technical bear market range. The profits of the consumer discretionary industry in the U.S. stock market are lower than expected. Under the impact of interest rate hikes and inflation, the profit forecast of the S&P 500 consumer discretionary industry in the second quarter has been reduced by nearly 20%, reflecting This reflects the expectation that U.S. consumption momentum will decline. But relatively speaking, there are structural opportunities for the US aviation sector. First, travel-related demand is strong, and the recovery of cross-regional travel is good for airline stocks; second, the cost-side pressure caused by rising oil prices has been alleviated to a certain extent, and there is some room for recovery in airline stock profit expectations, and the industry level may outperform the broader market.
3. China's exports: Exports of clothing, automobiles and parts related to travel consumption may still have high room for growth
In the second half of the year, my country's exports will face dual pressures from declining demand and intensifying competition. First, the cooling of consumer demand in the United States has driven down global economic growth and weakened external demand; second, the recovery of production in economies such as India and ASEAN has intensified the competitive pressure on my country's exports.
However, due to the adjustment of the U.S. consumption structure and the advantages of China’s industrial and supply chains, China’s exports still have a certain degree of resilience. Clothing exports benefit from overseas travel consumer demand, while capital goods exports such as automobiles, parts, and machinery and equipment will be relatively strong.
(Introduction to the author of this article: Vice President of Guangdong Securities Research Institute, chief macro researcher, certified public accountant, Ph.D. in finance from the Chinese Academy of Fiscal Sciences. New Fortune The third best analyst in macroeconomics (team). Research direction : Macroeconomics, Fiscal Theory and Policy )
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