Last week, the actual GDP growth figure for Q2/2024 was at +2.8% (Q/Q - annualized) far exceeded the market's +2% forecast. The PCE inflation figure also remained at +2.6% y/y (higher than expected).
These two reports have led most people to believe that the Fed can achieve a soft-landing, and the Fed still has time to wait for inflation to fully subside before cutting interest rates.
Additionally, in the previous podcast episode, many Viet Hustler readers were quite surprised why Viet Hustler was not too concerned about the goods deflation issue? Why has goods PMI been in contraction territory for a long time but Viet Hustler only worries when services PMI enters contraction?
Therefore, this weekend's Macroeconomic article from Viet Hustler will provide readers with an overview of the drivers of US economic growth through the GDP accounting method.
Through that, Viet Hustler will also provide assessments of the current recession probability after last week's better-than-expected Q2/2024 GDP report.
Disclaimer: Some views in part 2 of the article are the personal opinions of the author and are not investment advice at all!
Drivers of the US economy through GDP statistics
Readers can view details on the two reports above (GDP + PCE) through Viet Hustler's mid-week articles:
Below, Viet Hustler only wants to provide an overall view of the components that make up US economic growth in the Q2/2024 GDP report.
Starting from basic economic knowledge: is the method of calculating Gross Domestic Product GDP.
The US uses the indirect GDP statistics method - expenditure approach as in the formula below:
GDP = C + I + G + NX
Where:
C : Consumption (personal consumption)
I : Investment = Fixed investment & Inventory (Total private investment = fixed investment + inventory)
G: Government spending (government/public spending)
NX: Net Export = export - import (net exports, or trade balance: exports - imports)
For example, for the US Q2/2024 GDP report last week:
Personal consumption and inventory rebounded compared to the previous quarter … is the main reason for the strong US economic growth in this period.
Therefore, depending on the economy, the role of GDP components differs. For example:
For large Western economies like the US and Europe: personal consumption is always the main driver of economic growth — the most important GDP component.
For current China, net exports still play a hugely important role in growth…
To help readers better understand the current US economic growth situation, below, Viet Hustler will point out the main components and their weights in the US GDP basket:
(1) Personal consumption (personal consumption expenditures): the backbone driver of the US economy
Personal consumption accounts for ~70% of total US GDP value (table below)
This is why Viet Hustler always emphasizes the strength of US consumer spending!
Of which, Americans currently spend 2/3 of total spending on services (spending on services is always double spending on goods):
Many readers are surprised by the importance of service consumption by Americans to the economy in Viet Hustler's podcast, below is the data evidence:
When needing to tighten spending: Americans will cut goods spending first before cutting service spending!
They will give up shopping for goods (especially durable goods) rather than give up using services!
This is why Viet Hustler is not too worried when goods inflation is negative - or goods consumption in the GDP basket slows down:
… many periods in the past, negative goods consumption growth still did not cause a recession (black circled areas in the chart below).
But if both goods + services consumption growth is negative – the recession will be extremely deep: like the crises in 2008 and 2020.
Looking at the labor market structure shows services play an even larger role in the US economy at the current time!
The service sector pays for >80% of Americans' wages in the private business sector!
Simply because the US economy is not a goods manufacturing economy:
Goods production is outsourced to countries with cheaper labor/material costs
Scientific progress increases automation in factories - labor in these industries also decreases.
Therefore, if service consumption growth is not good (shown by service prices having to decrease to attract consumers)
=> A large number of service sector workers laid off will more easily lead to a recession!
(2) Private investment: also closely tied to consumption demand
Private investment accounts for ~ 18% of GDP value, mainly fixed investment and non-residential (» fixed investment » Non-residential):
This is the expenditure component from businesses!
However, this component is often based on businesses' forecasts of consumption demand.
(3) Government spending: steadily increasing
Government spending has increased quite rapidly in 2024 (up +7% Y/Y in Q2/2024)!
The federal government spends most of its money on National defense (National defense).
General public spending (Consumption expenditure) is divided into sub-tables.
(4) Net exports: The US is always a trade deficit country!
The US trade deficit situation is shown in net exports often negative (exports < imports)
=> Negative net exports have a subtracting effect on total GDP.
However, this is not bad because:
Imports play an important role in US inflation pressure: many basic consumer goods are produced outside the US!
The increasing trade balance deficit due to higher import volumes benefits the US disinflation process at the current time.
The US trade deficit also provides more USD to the world, contributing to making USD the most popular currency today.
The possibility of a US economic recession after the Q2/2024 GDP report
Americans' consumption strength remains strong
The GDP report shows consumer spending growth continues to carry the US economy.
» This aligns with all consumer data - savings - consumer credit borrowing in June:
In June, spending growth once again exceeded income growth…
(… while 2 months prior, spending growth was lower than income growth before revision last week).
And to maintain such spending strength, Americans have cut savings and increased borrowing:
The household saving rate in June continued to fall to 3.4% – indicating that people continue to abandon saving for consumption:
Consumer credit debt remains at an all-time high (accelerating since late 2022):
However, how much longer will consumer borrowing last if income growth continues to decline?
In June, US personal income growth was only +0.2% m/m – half of the estimate (+0.4% m/m).
The May 2024 income growth figure was also revised down from +0.5% m/m to +0.4% m/m.
The credit card delinquency rate is also gradually rising:
Despite continued consumption, Americans remain quite pessimistic about the economy:
Only 12.5% of US consumers expect the business environment to improve in the next 6 months – according to the Conference Board survey.
In contrast to the 48% who expect stocks to continue rising next year.
Inflation is still on a downward trend, but quite slowly:
The high GDP report is due to continued strong spending…
… accompanied by June PCE (last week) still at +2.6% y/y (higher than expected +2.4% y/y),
—> many fear inflation will rise again.
However, Viet Hustler still believes inflation is on a downward trend, albeit extremely slowly. Because:
The +2.6% y/y figure is higher than market expectations for disinflation but still did not increase from the previous month!
One month's data does not indicate the trend!
Inflation is still “sticky” (stubborn) mainly because consumer spending demand continues to persist…
… but over time, as income growth is not high + credit card debt comes due, Americans will also need to slow down spending!
Especially, we are at the beginning of summer vacation (for June data), when people increase spending on services – leading to economic growth.
In fact, super core services PCE (excluding housing services) grew at +0.19% m/m, this is not a worrying figure!
Of which, the 3-month average (3 months MA: usually shows the trend) has returned to pre-pandemic levels.
This shows that inflationary pressure is no longer too strong.
So, does the US economy still face recession risk with the +2.8% y/y economic growth figure?
The answer is yes, still!
Recession risk does not disappear with just one quarter of economic growth better than expected.
Not to mention this is only the first GDP growth estimate, which may be revised in the next 2 months.
Recession is a process of economic movement: GDP is not the only indicator to assess recession risk!
Because the economy has interlinks between: consumption - business - labor (also the main source of income for consumption)
As Viet Hustler has emphasized many times:
Recession will start when consumption growth slows down (slows down, not necessarily decreases)
=> businesses stop expanding
=> layoffs cause people to lose jobs or have wages cut
=> people losing jobs/reduced wages will cut consumption
This is what will cause consumption to truly collapse!
The current economic slowdown may be slower than previous Fed tightening cycles because:
After Covid, people have high consumption demand – they also have sufficient monetary resources from the previous QE (quantitative easing) period to spend.
Businesses are more reluctant to lay off workers because after Covid, they faced difficulties in rehiring employees.
Businesses also do not want to cut production while consumer demand still exists, as they have already suffered enough damage from the Covid period.
Therefore, in addition to GDP growth and consumption, attention should also be paid to the labor market.
Signs of deterioration in the labor market have gradually become apparent:
Read more about the labor market situation: Soft-landing, recession or stagflation (section I.2)
Bloomberg forecasts that payroll growth in July will continue to slow:
FYI: The video below partly illustrates the relationship between economic growth and labor. (Source: Games of Trades).
The layoff rate according to the Current Population Survey of Fed Minneapolis has started to increase.
Previous cumulative increases in this data have always led to recessions.
FYI: Labor data to be released next week is very important for the Fed's stance, especially for the September meeting!
Tuesday: June business job openings report (job oppenings)
Friday: July labor statistics from BLS, including payroll survey + household survey.
Meanwhile, the FOMC meeting results will be out on Wednesday:
High likelihood that the Fed will keep interest rates unchanged, but the market is watching the Fed's stance to gauge whether the Fed will cut rates in September.
Growth - recession is an economic cycle:
Because it is a cycle, GDP figures can also peak and decline…
Therefore, before each recession, GDP growth can still be boosted to reach its peak:
For example, GDP growth peaked before previous recessions:
Not to mention that the higher GDP growth this quarter, the greater the pressure to maintain positive GDP growth next quarter:
i.e., next quarter's GDP must be higher than the current GDP figure to have “growth”.
CONCLUSION
Through the actual GDP figures from the original BEA (U.S. Bureau of Economic Analysis) report at the beginning of the article, Viet Hustler hopes readers gain a comprehensive view of the components driving U.S. economic growth, when:
Household consumption accounts for the majority of U.S. GDP value.
Of which, Americans allocate 2/3 of spending to services.
When tightening spending, they will cut spending on goods first (especially durable goods) rather than service spending.
Government spending increased quite rapidly in Q2/2024 (compared to the same period last year).
The U.S. is still always a net importer (imports > exports)! This keeps the trade balance in negative territory. But this is not a bad thing.
The strength of U.S. consumption continues to support the U.S. economy in Q2/2024. Especially since in June, consumption growth returned higher than income growth. The still robust consumption contributes to persistent inflation (sticky): June PCE higher than expected. But Viet Hustler still believes the disinflation process is continuing (albeit quite slowly).
Returning to recession, Viet Hustler still warns of the lingering recession risk. Because signs of weakness in the labor market are gradually emerging with a large number of full-time jobs being lost. And economic growth is a cycle: if it peaks, there will also be a decline!
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