US economy in crosshairs of factors pointing to slowdown
The US economy is in the crosshairs of a convergence of factors, all pointing to slower growth ahead. Top of mind today is the potential default of China’s real estate giant Evergrande, which is weighed down with $300bn in debt.
The epicenter of the damage would be in China and its property and banking sector. There are fears the contagion could spread to global markets, as evidenced by a worldwide sell-off in equity markets on 20 September. And it’s not just Evergrande – UBS estimates there are 10 more property developers at risk.
If China’s already lagging economy slows further, US manufacturers will feel the impact from its No 3 export market. Year-to-date through July, the US exported $82.8bn in goods to China, up 42% from the pandemic-stricken year-ago period. US imports year-to-date through July from China were $270.0bn.
The US dollar has been trending up this year, and any meltdown in China’s economy could push the greenback higher still, in a flight to safety, making US exports less competitive.
Meanwhile, the US Federal Reserve is expected to start tapering its $120bn of monthly asset purchases later this year, the first step towards an eventual interest rate hike.
On the fiscal front, as the effect of massive pandemic stimulus dissipates, the $1tr infrastructure stimulus bill is stuck in the political mud for the moment, as is another $3.5tr spending plan.
Thus, it’s no surprise economists took down consensus 2021 US GDP estimates again to 5.9% from 6.2% in August and 6.6% in July. GDP growth for 2022 is forecast at 4.3%.
The taming of growth expectations is in line with the slowing pace of inflation. The August headline Consumer Price Index (CPI) rose 0.3% month-on-month following a 0.5% rise in July. Used car prices, a major culprit in rising inflation, slid 1.5%, but new vehicle prices rose 1.2% amid the continuing auto shortage.
The core CPI, excluding food and energy, was up just 0.1%, the smallest increase since February. Year on year, both the headline and core CPI remained elevated at +5.3% and +4.0%, respectively.
Lurking is the surge in natural gas prices to around $4.80/MMBtu. With US inventories low and big demand draws from Europe and Asia in the form of liquefied natural gas (LNG), US gas prices stand to spike further in the event of a cold winter. This would cause electricity prices and heating bills to rise, along with feedstock costs for US petrochemicals and plastics producers.
Despite waning consumer confidence readings, partly due to inflation, retail sales rose 0.7% in August after dropping 1.8% in July. Ecommerce (+5.3%) and furniture (+3.7%) led the way, offsetting declines in automotive (-3.6%) and electronics and appliances (-3.1%).
And the US housing market has been able to shake off labour and materials shortages, with August housing starts up 3.9% at a seasonally adjusted annual rate (SAAR) from July to 1.62m, which was also up 17.4% year on year.
Overall manufacturing activity has been solid, with the August ISM Manufacturing PMI rising to 59.9 versus 59.5 in July, logging its 15th consecutive month of expansion (above 50) and reversing two consecutive months of lower readings. The ISM Services PMI eased to a still-strong 61.7 in August from a record 64.1 in July.
However, light vehicle sales continue to be a drag as the semiconductor shortage shows no sign of easing with August sales down 10.7% from July to a SAAR of 13.1m units. Sales were down 14.4% from a year ago. Automakers further slashed production runs for the coming months.
The transition to electric vehicles (EVs) could cause more pain as well, as EVs use more semiconductors, and will also test the global supply chain for battery materials.
Source: ICIS, by Joseph Chang https://www.icis.com/explore/resources/news/2021/09/23/10687988/cdi-economic-summary-us-economy-in-crosshairs-of-factors-pointing-to-slowdown