Labor market and consumer spending push back the Fed's soft-landing dream

FREE SEMINAR: How to protect your account from economic risks

By Steve Le - Monday, 5/13/2024 4PM New York Time

In the current volatile economic situation, protecting your account is of utmost importance but doing so effectively is not easy. In the free seminar on Monday, Steve Le, Founder of Viet Hustler, will delve into important topics related to Hedging and Diversification to help everyone protect their accounts from upcoming macroeconomic risks.

Knowledge shared:

Basics of hedge and how to identify assets that need to be hedged
Effective hedging tactics
How to diversify optimally
Types of assets and strategies to protect accounts

How to participate:

Participate Discord via link
Log in or create a Discord account if you don't have one
Click on the event link here to join at 4PM New York 05/13

Note: The exchange session will not be recorded and uploaded to Youtube.

Boston Fed Governor - Susan Collin last week stated a fact: The economy needs to weaken for inflation to sustainably fall back to 2%. And Collin is not lying to us… because if the economy remains strong, inflation may decrease but can rise again if demand remains high.

Last week's labor and consumer data show: the Fed's inflation victory is possible, only if the Fed accepts declining consumption and a weakening labor market in exchange. And in reality, with the Fed's current determination to keep interest rates high for longer, the Fed is gradually achieving this result:

April unemployment rate has risen to 3.9% - the highest in over 2 years in the labor market and
McDonald has to consider selling $5 meals for low-income people like during the 2008 economic crisis in the consumer market.

Viet Hustler's weekend Macro Economy article is dedicated to warning readers about the deteriorating signs in the US labor market and consumer spending at the current time.

These signs are still faint but sufficient to confirm that the Fed's soft-landing dream remains quite distant….

Labor market: labor supply shortage condition is coming to an end

Labor tightening situation in the US after the Covid pandemic:

Native population (born in the US) has decreased from 170.8 million (July 2023) to 168.2 million (as of March 2024). ~ decrease of 2.6 million population in just 8 months.
In compensation, immigrant population (born abroad) has increased +2.7 million people (record high of 40.5 million people):
- However, many immigrants lack work permits
- Creating a labor shortage + but consumer demand remains high (due to population growth from immigrants)…
- => pushing inflation high during 2022-2023.
In addition, labor supply is also contracting due to the early retirement movement among young people - especially after Covid (image below),
- => leading to even though the population is not aging, the social security burden continues to increase + native labor shortage…

=> These are the main reasons why the labor market tightened (labor supply < labor demand) after Covid…!

FYI: The labor supply shortage at that time pushed up businesses' hiring costs, i.e., high worker wages promote spending

→ leading to continuously rising inflation!

Read more: Labor indicators and their implications for predicting inflation - consumption.

Change in the current situation: the labor market has loosened

To address the labor shortage issue, immigrant labor has been welcomed more — they have gradually filled the vacant job positions:

With immigrant labor filling the vacant jobs, the tightness of the labor market (due to supply shortage compared to high labor demand) is gradually being resolved…

…. but signs of weakening in the labor market are also appearing, including:

Unemployment rate has risen to 3.9% - the highest since 01/2022.
- Although this is still a low figure but due to the previous low base has pushed Sahm labor recession index to the level of 0.37.
Payroll job growth rate (+1.8% y/y in April) is also at the slowest level since 03/2021.
Number of new job postings lowest since 02/2021 + quit rate lowest since August 2020.
Hourly average wage growth (+3.9% y/y) also lowest since 5/2021.

Of course, the above data may just be the normalization move of the labor market. But as the meaning of Sahm Rules:

Even if the unemployment rate looks low, but if there is growth momentum (3 months MA), it will quickly turn into a significant increase….

can also apply in this case… with the possibility that the deterioration of the labor market could escalate along the current momentum.

Read more about Sahm Rules (middle section of the article).

Not to mention, in the current high interest rate environment - inflation still high, when the labor market normalizes => wage growth slows down…

A shock of slowing economic growth could occur as consumers spend less.

And this has actually happened to a segment of low-income consumers!

Consumer market: Is a spending cut shock from American people coming?

Viet Hustler always emphasizes: Consumer spending accounts for ~67.9% of US GDP.

If American people cut spending in the coming time: this will be a major shock to the economic growth of the Stars and Stripes country.

And there is a high likelihood this shock could happen as people are bearing pressure from inflation - high interest rates - depleting savings….

Cash buffer from excess savings during the Covid period has been depleted:

Latest estimate: total excess savings (excess savings) from the Covid period have been depleted (and turned negative)….

i.e. the cash buffer for people to spend comfortably is gone…

Pressure from inflation and high interest rate environment on all essential costs of people

The burden from housing costs is the largest:

Mortgage interest rate growth is >6 times wage growth in 2 years 2021-2023:
For renters: rent growth also exceeded wage growth in 2019-2023 in most major urban areas in the US:

Burden from other costs:

Most essential costs such as food (at restaurants), clothing, and healthcare remain high or are rising again.
In addition, the cumulative inflation impact over the past ~3 years is quite large.

Spending cuts have begun from the low-income consumer group:

In the Q2/2024 business outlook reports from companies to investors: the phrase “low income consumers” (low-income consumers) is being mentioned 2x more than usual.

Many mass-market consumer brands are also warning of a slowdown in spending by the low-income consumer group:
And recently, McDonald is also having to reconsider the USD 5 meal program (like during the 2008 economic crisis) due to the “poverty” situation of the customer segment it serves:
In particular, “Buy now and pay later” (buy now pay later) programs during Black Friday and sales events are now haunting buyers again:
- 54% of Harris Poll survey participants said they spent more than they could afford due to the “Buy now pay later” program at that time.

Finally, consumer debt is also at an explosive threshold:

Just US household credit card debt alone has reached >USD 1 trillion in April 2024, up +7.6% Y/Y
- i.e., US households are relying more on revolving credit for spending despite rising borrowing rates.
- This could signal financial stress for households in the near future.

CONCLUSION

If only one of the 2 factors: labor market weakens or consumption declines occurs, it may not be too concerning yet. But if both factors occur, it is a clear sign indicating a recession is approaching.

Of course, current labor market data cannot yet be said to have turned negative, only showing that the labor market is normalizing. However, as the Sahm rule warns: once unemployment gains momentum in rising, it can rise quickly — especially if weakening consumer demand creates pressure forcing businesses to scale back.

So, discussing the consumer market: consumption is showing signs of decline! Very simply, the first segment of the population to feel the pressure of inflation and decide to cut spending is low-income consumers. And mass-market consumer goods companies have reported concerns about the slowdown in consumption in this customer group. The decisive question is only when will the spending cuts spread to the majority of middle-income people? The answer is: wait and see if inflation and the prolonged high interest rate environment persist.

And the Fed understands best when maintaining high interest rate policy that: gradually rising unemployment - declining consumption is the trade-off needed for sustainable inflation decline. Because in Fed policy history, the Fed has only achieved soft-landing a few times, but then hard-landing came a few years later when inflation rose again:

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