OSAGYEFO MAZWAI: US data points to global turbulence, but its severity is unclear

For the past year or so market participants have been grappling with the possibility of a recession in the US, an event that would have consequences for the global economy.

It’s not for nothing that the phrase “when the US sneezes the world catches a cold” has become embedded in market parlance, highlighting the risky potential outcomes of such an event.

This gloomy tale has shifted as time passed, with the initial “hard landing” narrative rotating 90º to a “soft landing” story, and then another 90º to the opposite end of the spectrum, now signalling a “no landing” narrative.

However, the recent release of US first-quarter GDP and April nonfarm payrolls offer us both a reminder and an opportunity to reflect on the risks that still prevail in the global economy, particularly as the reality of prolonged restrictive monetary policy takes hold and the world again stares down the barrel of a recessionary gun.

Preliminary estimates for US first-quarter GDP came in well below what most market participants had expected, with the reading of 1.6% falling short of expectations of 2.5% growth.

The primary drags on the GDP print were net exports and inventories, but we should not ignore the shrinkage in consumption expenditure (which makes up 70% of GDP in the US), federal government spending (US debt-to-GDP is at about 120%, and further constrains the economy), as well as local and state government spending.

The conundrum presented by the latest data was buried in personal consumption expenditures (PCE) and core PCE. First, the slowdown in year-on-year consumption growth was confirmation, to an extent, of the restrictive monetary policy conditions in the US that affect consumers' ability to spend. On the other hand, the decline in consumption was not of sufficient magnitude to give the Fed enough confirmation that the economy is slowing.

More importantly for the discussion around the said conundrum was the re-acceleration in core PCE, which excludes the volatile elements of the expenditure basket — food and energy — and is the preferred gauge of consumer inflation for the Fed. The market’s mixed reaction on the day, looking at bond yields, equity markets and the dollar exchange rate, confirmed the conundrum. Even though the tide turned eventually, the dynamic warrants greater reflection.

A slowdown in economic activity is typically a negative for equity markets specifically. An incrementally less robust domestic demand environment implies that US corporates will face a tricky outlook as top-line growth could be negatively affected. But it was bonds that left us scratching our heads. Typically, you would expect bond yields to fall as the probability of the US central bank cutting interest rates in the face of economic deterioration increases. Yet bonds rose across the yield curve.

In my view, there are good reasons to expect US economic activity to continue to slow over the remainder of the year. Consumption is set to continue to be hit by elevated interest rates in the US. A significant driver to this point has been the resilient labour market, but more recent data from bank credit analyst research suggests that excess labour demand is diminishing, while labour supply is growing at a slightly more rapid rate.

In the present environment, the labour force has held bargaining power over wages, which may be why wage growth, consumption and inflation have remained resilient. Once that trend turns and employers become wage setters, an environment will have been created where wages will become constrained, and the negative knock-on effects of restrictive policy will be felt more directly. An oversupply of labour typically coincides or slightly follows the start of a recession in the US.

Last week’s nonfarm payrolls data (175,000 versus about 243,000) also showed a potential kink in the labour market. The salient point is that the risks will be material for global growth and asset class returns. South Africans have reason to worry about the effect on commodity prices, which may dampen the already constrained fiscal outlook. Lower global demand for goods and services will be negative for our miners and export-orientated sectors.

We should keep these dynamics in mind as we ponder the kind of “landing” the US economy is going to have in 2024. There appears to be some economic turbulence on the horizon, but this in itself is not clear-cut evidence that the US economy is at a cliff’s edge. We require more evidence to make a definite conclusion, but the potential extremity of the situation ought not be ignored. The coming 12 months will be critical.

• Mazwai is investment strategist at Investec Wealth & Investment International.