World Economy

Taking a Closer Look at the US

Taking a Closer Look at the US Taking a Closer Look at the US

The US economy is the most important short-term global influencer—not Brexit, says JP Morgan Asset Management’s Stephanie Flanders.

Talking at the Morningstar Investment Conference in London, the chief market strategist for UK and Europe at the US asset manager says although the US is not heading towards a recession, there are some factors still undermining the economy that need to be closely examined, news outlets reported.

Flanders says that the rate of US workers quitting their jobs remains very high and despite a healthy labor market it is “probably getting tighter”.

She says: “Global recession fears have receded but the economy is weaker since the start of the year so we don’t expect a recession but we expect weakness within the market.”

JP Morgan says it expects two further interest rate hikes by the Federal Reserve in the second half of the year.

“The market had always been predicting a slower pace of rate rises. When interest rates go up they normally go up by 2 percentage points per year,” she says.

Despite playing down Brexit risks compared to the US, in the short term, Flanders says the EU referendum does present problems for markets.

“Businesses in the UK are delaying their plans. If people did chose to leave the EU it is likely the UK will restructure its economy,” she says.

  Consumption Dampens

American consumers aren’t what they used to be—and that helps explain the plodding economic recovery. It gets no respect despite creating 14 million jobs and lasting almost seven years. The great gripe is that economic growth has been held to about 2% a year, well below historical standards.

This sluggishness reflects a profound psychological transformation of American shoppers, who have dampened their consumption spending, affecting about two-thirds of the economy.

This, as much as any campaign proposal, may shape our economic future. There’s an Old Consumer and a New Consumer, divided by the Great Recession. The Old Consumer borrowed eagerly and spent freely. The New Consumer saves soberly and spends prudently.

Of course, there are millions of exceptions to these generalizations. Before the recession, not everyone was a credit addict; now, not everyone is a disciplined saver. Still, vast changes in beliefs and habits have occurred.

A Gallup poll shows just how vast. In 2001, Gallup began asking: “Are you the type of person who more enjoys spending money or who more enjoys saving money?” Early responses were almost evenly split; in 2006, 50% preferred saving and 45% favored spending. After the 2008-09 financial crisis, the gap widened spectacularly. In 2016, 65% said saving and only 33% said spending.

What’s happening is the opposite of the credit boom that caused the financial crisis. Then, Americans skimped on saving and binged on borrowing. This stimulated the economy. Now, the reverse is happening. Americans are repaying old debt, avoiding new debt and saving more. Although consumer spending has hardly collapsed, it provides less stimulus than before.

Consider the personal savings rate: the difference between Americans’ after-tax income and their spending. If a household has income of $50,000 and spends $45,000, its savings rate is 10%. Here are actual figures. From 1990 to 2005, the savings rate dropped from 7.8% to 2.6%. Since then, the savings rate has risen; it was 5.1% in 2015.

  Borrowing Subdued

Federal Reserve figures on debt tell a similar story. From 1999 to 2007, household borrowing (mainly home mortgages and credit card debt) increased nearly 10% annually, far faster than income gains. People mistakenly believed that they could safely borrow against the inflated values of their homes and stocks. Now, borrowing is subdued.

In 2015, household debt of $14 trillion was unchanged from 2007. While many consumers borrowed, others repaid or defaulted.

Businesses could build more factories and shopping malls. But with weaker consumer spending, are they needed? More exports would help, but economies abroad are weak.

Government policies are also frustrated. The Fed’s low interest rates don’t work if people don’t want to borrow. Ditto for tax cuts.