How severe is the US economic slowdown? As I showed on Friday, last week’s disappointing US employment report is the result of too much of a good thing. The Trump administration brought small businesses into the labor market just as listed corporations began to shed employment, leading to pockets of scarcity among unskilled workers.
The sectors that show the highest wage growth, for example, leisure and hospitality, also showed the biggest reverses in employment growth. Parts of the economy are bumping up against input constraints. CapEx remains disappointing, in part because the Trump Administration’s tariff war with China added a big dose of uncertainty to corporate planning.
The pay increases that accrued to unskilled workers, moreover, came from such a low level that households are reluctant to spend. Monday’s retail sales data showed that the December collapse in US retail sales was even worse than the initial reports suggested. The plunge in December sales was the worst monthly reading in the past ten years (see chart below).
Retail sales increased in February, but the six-month moving average of monthly change in retail sales excluding gasoline and autos has languished at zero for the past two months. That’s the worst result for the six-month average since the recovery began.
It appears that US households are saving rather than spending. In December, US households saved 7.6% of their disposable income, a small proportion by global standards, but the highest reading since 2015. The bottom half of US households by income can’t easily get credit and lives from paycheck to paycheck. That’s why pay increases to unskilled workers haven’t translated into more spending.
All this adds up to a growth trajectory of around 1% for 2019. The Atlanta Federal Reserve’s GDP Now tracking model projects GDP growth of just 0.2% annualized during the first quarter. With profit margins compressing in the S&P 500 and earnings projected to fall 4% year-on-year during the first quarter, I would have expected a less cheerful market response to the retail sales data. This is a sluggish economy but not a particularly dangerous one.
Nonetheless, US markets followed China’s partial recovery overnight from last Friday’s rout. A-shares rose nearly 2% and H-shares gained over 1%.
A widely-read Goldman Sachs report forecast a $4 billion shift in Chinese chip demand towards American producers at the expense of Asian suppliers under a likely US-China trade agreement. This prompted a rally in chipmakers, with Nvidia rising nearly 8% in Monday’s New York session. Qualcomm rose 2.2%, and the Philadelphia Semiconductor Index jumped by 2.4%. Asian semiconductor shares nonetheless traded strongly in New York, with Taiwan Semiconductor’s ADR up a bit less than 1%.
The market now appears settled in its view that China’s economy will continue to grow at a bit over 6%. New CNY loans for February printed at 885.8 billion, somewhat less than the market consensus, but still on trend after seasonal adjustment. My seasonal adjustment of the loan data using Eviews econometrics software is shown below.
Bocom International’s chief strategist Hao Hong explains recent volatility in Chinese shares as a function of rising market leverage. In the last few weeks, the proportion of margin trades in total market turnover has bumped up against its regulatory ceiling of 12%. A lot of margin debt means occasional forced sales by short-term traders and an uncertain near-term outlook. China’s economy is sound, but this is a treacherous market for short-term trading.
The market I love to hate (and love to short) is Turkey, the worst-performing economy in the OECD. The country is officially in recession, with negative GDP growth year-on-year of 2.4%.
With industrial production down 10% year on year and inflation at 20%, Turkey seems ripe for another big devaluation. Currency depreciation between 2013 and today reduced the value of the Turkish lira by 2/3, from 1.8 to the dollar to 5.4, and it seems likely that Turkey will revisit the 7 to the dollar exchange rate of August 2018. Turkish households have slid into a debt trap that will force them to cut spending in order to repay existing credit card and mortgage debt.
Consumer credit outstanding in Turkey has quadrupled since 2010, while the interest rate on consumer loans has jumped from 10% to 35%. That’s the result of the last round of currency devaluation. With world trade shrinking, Turkey can’t export its way out of its problems. It will have to cut spending, which means that the relatively modest decline in GDP during the past two quarters will only get worse.
With world trade volume shrinking, Turkey can’t export its way out of its troubles, and with households constrained by a credit squeeze, it can’t increase domestic demand. It will have to reduce debt in real terms by devaluation.