THE COMPLEXITY OF A PULSE: How healthy is the US economy?
Ruan Goosen – Portfolio Manager
September 2024
The doctor rushes into the dimly lit emergency room snapping on latex gloves. The patient lies on a gurney, monitors beeping loudly, erratically. Sweat beads the doctor’s forehead as she hovers over the motionless body, stethoscope pressed to the chest, listening for any sign of a steady rhythm. “What are the vitals?” she asks the nurse, eyes flicking to the monitors and screens. “All over the place,” the nurse replies. “I’m struggling to find a pulse,” the doctor warns, reaching for the defibrillator; it may take a shock to bring this one back.
“Is there a pulse?” – a familiar line from popular hospital dramas – a doctor checking if the patient is alive or dead, two opposite states measured by a single sign: a pulse. If the doctor feels a pulse on the main artery, it’s an immediate sign of life. But if no pulse is found, often after frantic chest compressions, the time of death is solemnly declared.
In a similar vein (excuse the pun) market participants and asset allocators try to measure the pulse of the global economy. In our macro, integrated world, the US economy is usually considered to be the heart of the global body. Its beat determines the flow of international trade, the direction of global monetary policy and the stability of financial system. Measuring the pulse of the US economy gives an asset allocator key insights into the direction world markets are heading, what stage of the business cycle we’re in and thus, which investment decisions to make.
Measuring the pulse of the U.S. economy isn’t as simple as checking a single vital sign. The economy is a complex mix of indicators that often send conflicting signals about its health. With an abundance of data available, it’s easy to end up with conflicting interpretations, causing uncertainty for investors. This confusion is similar to Schrödinger’s cat paradox, where the cat is both alive and dead until someone checks. In the same way, investors make predictions about the economy’s condition, but its true state only becomes clear with hindsight – very often only after the consequences have materialised.
While no single measure can fully capture the health of the U.S. economy, one vital element does stand out: the U.S. household. The entire economy depends upon it, yet it is often overlooked when assessing the “patient’s condition”. In our view, determining the pulse of the US household is key because it is the cornerstone of economic activity. Households provide labour to the economy (employment) and they are the primary consumers of goods and services. As a result, the overall health of the economy depends largely on the state of the U.S. household: ergo, understanding the U.S. consumer and labour market offers valuable insight into the state of the U.S. economy.
A Closer Look at US Households and Labour
Simplistically, households only spend as much as they earn—or so you’d think. While individuals can leverage credit to supplement their income (we’ll discuss this a bit later), for now let’s assume that household spending is determined by household income. The primary source of disposable income is real wages which are earned by participating in the labour market. Although there are other sources of income and wealth, in the interest of reducing noise, we’ll focus on wages as the driving force behind household spending. The reasoning is straightforward: a strong economy depends on a strong consumer, and a strong consumer require a robust labour market that delivers sufficient real wages to fuel spending.
What is the current state of the U.S. labour market?
After a remarkable recovery following the pandemic, the unemployment rate hit a low in 2022/2023. However, in 2024, unemployment began to inch upward again – a pattern that, historically, is often followed by more significant rises as illustrated in this chart.
Some suggest that the recent “cooling” in the labour market is somewhat exaggerated. While the unemployment rate has been rising, it remains low relative to historical levels (1970–2020). Furthermore, some market observers contend that post-pandemic labour market dynamics differ significantly from past periods. Factors like high immigration levels—both legal and illegal—and the rise of remote work have disrupted long-standing economic models and relationships. This chart illustrates how the employment of foreign-born workers has significantly outpaced native-born workers since the pandemic ended.
One of the measures that caught some flack of late was the infamous Sahm rule, once regarded as a reliable recession indicator. Even Claudia Sahm, who developed the rule, has questioned its accuracy in an article titled Why Might This Time Be Different, citing the aforementioned labour market distortions as key reasons why the Sahm Rule may have triggered a false positive this time.
Another encouraging perspective on the labour market is that prime-age employment (between the ages of 25-54) has made a significant post-pandemic recovery, as depicted by this chart.
Although US unemployment is rising and job creation is slowing, the proportion of prime-age Americans employed is now at its highest level in over two decades. This cohort accounts for roughly 65% of all US workers; over 80% of the prime working-age population is currently employed. This suggests, at first glance, that the US job market remains robust, even as economic conditions cool.
But can we really conclude that the current labour market is healthy given the broader economic context? Unfortunately, it’s not simple. Just as medical professionals emphasise the importance of checking the pulse for a full 60 seconds to get an accurate reading, so we must spend more time examining the recent employment trends to make a fair assessment of the labour market.
Labor Demand Weakening Amid Strong Supply
While labour supply has been robust, demand for labour has been trending downward since April 2022. The graph below shows there are still more job openings than unemployed workers—typically a sign of a healthy labour market. However, this gap has been narrowing considerably, and if the supply-demand balance doesn’t change dramatically, the number of unemployed individuals may soon exceed the number of available jobs.
We are not overly optimistic that labour demand will strengthen anytime soon. More companies are filing for bankruptcy, and the graphs below illustrate a sharp surge in Chapter 11 filings in 2023/2024. These filings are at levels comparable with 2020 and only exceeded by the wave of bankruptcies seen in 2010. This is a significant real economic trend to consider as its could severely impact the demand for labour.
While job openings are declining, demand for labour has not completely dried up. Companies are still hiring and people are still finding jobs. Although having a job is certainly better than not having a job, the devil is always in the detail. Since August 2023, full-time jobs have declined by just over 1%, with most new jobs being part time employment.
While overall job creation is positive, these jobs don’t offer the same level of security and income stability for households. Another trend worth monitoring is the proportion of the population holding multiple jobs, as illustrated in this graph.
Although this metric hasn’t been a reliable recession indicator historically, it nevertheless reflects the economic reality faced by a growing portion of US households. It is reasonable to assume that if individuals could get by with one job, they wouldn’t seek additional sources of income. The uptick in multiple job holders, paired with a rise in temporary employment and a decline in full-time jobs, suggests that the quality of employment being created is not quite as robust as headline numbers might indicate.
Household Savings and Debt Levels
The reduction in labour demand, coupled with an increasing labour supply, suggests that unemployment may continue to rise, eroding household incomes and diminishing spending—unless households have enough savings to weather the storm.
Do households have enough savings? Probably not. Savings accumulated during the pandemic have been largely depleted. Without sufficient savings, households will struggle to maintain their standard of living if wage earners lose their jobs. The reason savings have diminished since the pandemic is because consumers have been living above their means. The charts below show how consumption has outpaced after-tax income by quite a margin…which is unsustainable – at some point this gap must close.
How has consumption remained so high relative to income? The answer: debt – specifically, a significant amount of credit card debt. Credit card debt has skyrocketed since mid-2021 in conjunction with the reduction in excess savings. This speaks to some extent to the ‘age of consumerism’ that the younger generations of Americans have become accustomed to; but it also paints a picture of unsustainable consumer behaviour that could exacerbate economic weakness if individuals/households aren’t able to pay back the ever-mounting credit card debt.
Are households paying back their debt? Again, not exactly. This chart shows a substantial rise in serious credit card delinquencies over the past two years, especially among 18- to 39-year-olds. It should be noted that the delinquency rate could come down with the Federal Reserve cutting rates (reducing debt-servicing costs). However, as households deplete their already diminishing savings and lose their primary sources of income should unemployment continue to tick upwards, these delinquencies could blow past the levels seen in the financial crisis.
Inconclusive Diagnosis
In conclusion, our diagnosis is inconclusive. We can feel the thready pulse of the US household and can see the economy is still functioning…but the heart rate is slowing. The labour market is cooling more rapidly than some headline numbers suggest, with a decline in job demand and a rise in part-time work that doesn’t reflect a healthy labor market. On the consumption side, households are spending beyond their means, depleting savings and relying on credit card debt to bridge the gap between income and expenditure. These signs suggest potential economic fragility rather than strength. If these trends continue and the heartbeat of the US economy slows further, we expect that the other organs of the U.S. economy will start being affected and begin to deteriorate.
Many market observers expect the Federal Reserve to step in and resuscitate the faltering economy, but is the Fed accurately assessing the situation? Are they diagnosing the problem correctly and providing the right solutions? Only time will tell…
