The United States economy is cooling off. Job openings are rising in the country and inflation is slowing down. Consumers are spending less and borrowing more. As Kavan Choksi Japan says, even though these dynamics may seem a bit worrying at the first glance, they tend to signal that the economy is indeed moving in the right direction.
Kavan Choksi Japan provides insight into how cooling off of the US economy is good news
The combination of lowering inflation and loosening labour market is likely to bolster the Federal Reserve’s confidence for an interest rate cut in the near future. This move would one of the most aggressive policy-tightening cycles in recent history. Lower rates make borrowing more cost effective, and can be a tailwind for both stocks and consumers.
The tightening cycle helped in controlling inflation and managed to bring supply and demand into a much better balance subsequent to the upheaval of the past few years. However, at the moment, the biggest question is whether the economy would be able to coast to a soft landing or if the sustainable slowdown of today would become tomorrow’s recession.
While things are slowing in the economy, they are slowing for the right reasons. Overly hot economic growth is hardly ever good for financial markets or consumers. In the last few years, economic growth has been pretty positive, but profit growth has been basically flat. Coming out of the pandemic, growth was quite overwhelming. This growth came at a time of supply chain dislocations and labour market scarcity, and hence many companies were not actually able to generate much profit off it.
As Kavan Choksi Japan says, much of the slowdown in the economy is attributable to a pullback in consumer spending. As consumer spending accounts for almost 70% of the economic activity in the United States, this moderation is a vital driver of slowing economic growth. The economy has gone from a period of above-trend growth to below-trend growth. However, in this situation, below-trend actually helps to relieve inflationary pressure, which is exactly what the Fed wants.
The slowdown does not imply to any trouble for the economy. The weakness is likely to be confined to low- and middle-income consumers, and points to more bargain-seeking behaviour instead of a total deceleration of spending. Record high household wealth, relatively low unemployment and increasing disposable income are among the “considerable tailwinds” for consumers. These factors are likely to keep the economy growing at a modest to moderate pace in the months ahead.
On the other side of the inflation issue is the labour market, which, despite softening considerably over the past two years, remains healthy, according to analysts. Data from the Bureau of Labor Statistics shows that job openings have decreased from around 12 million in March 2022 to about 8 million in May this year. Meanwhile, the unemployment rate has increased from a low of 3.4% in December 2022 to 4.1% in June. Conditions in the labour market have returned to about where they stood on the eve of the pandemic; strong, but not overheated.