While most people were celebrating the holidays, economic pundits published some lengthy self-criticisms focused on why the early 2023 predictions of US recession proved exactly wrong. Understandably, they focused on the traditional recession indicators (like inverted short- and long-term yields) that had failed to indicate. But strong alternative modes of analysis were lacking, and the meek consensus that emerged over the holidays — forecasting some sort of mild slowdown for no particular reason — looked a lot like a punt. SIG’s slightly bolder forecast is for a definite and significant slowdown, based on factors that we believe have been underestimated.
The first and most important is consumer credit-card debt. One widely cited reason for the unexpected resilience of the US economy in 2023 was strong consumer demand. The thought had been that consumers shocked by significant inflation would respond by spending less. Instead, they responded by taking on debt. The average balance per consumer reached a ten-year high. (Canada also experienced a large consumer-credit increase in 2023.) This will have seemed reasonable enough even to poorer consumers because jobs were plentiful and wages rising. Consumer debt had plummeted during Covid, with household balance sheets improving due to thrift, fear, and government stimulus payments that often went into personal savings or to pay off household debt. Besides, inflation expectations can lead poorer consumers to buy now while they have a chance. US consumer inflation expectations were noticeably high — with growing numbers of Democrats adopting Republicans’ gloomy expectations — over 2023 even as their borrowing also grew. At the least, this all points to weakened consumer demand in 2024, removing a key buttress of 2023’s prosperity.
The second underestimated factor is the creation of blocs for foreign direct investment. Along with cross-border mergers and acquisitions, FDI again slowed in many parts of the world. Most famously, China’s inward FDI went negative in the third quarter. Somewhat less famously, inward FDI growth slowed way down in Southeast Asia and India. The reasons are many and vary greatly by country, but the weakening of the Chinese economy is certainly one. Chinese imports from ASEAN countries have been stagnant for years, while its intermediate-goods exports into ASEAN are endangered by the ongoing American-led effort to lessen the dependence of global supply chains on Chinese inputs. Southeast Asian and Indian investment, as well as Chinese, is in each case becoming more inward-focused. Meanwhile, the North American economy is itself becoming more regionalized in production terms as three of the four top inward FDI destinations in the first half of 2023 were Canada, the US and Mexico. (The fourth, at number two, was Brazil.) One reason for this is that US onshoring, near-shoring and friend-shoring — fueled by Biden-administration spending on high-tech and green industrial policy, as well as US defense contractors meeting Ukrainian demand as shaped by US domestic-provider policies and practices — are creating an Americas production bloc that structures a large portion of global FDI. In many ways, this is a tribute to the strength and flexibility of the US economy. But, in the short term at least, the regionalization of investment, given that it is less efficient than globalized investment and production, means higher goods prices. It also means increased competition for US multinationals and exporters at ever higher points in the supply chain. With very high US government and US consumer debt and stable or rising wages alongside low unemployment, the regionalization of direct investment will fuel a US slowdown. US CEOs’ consistent expectations of low capital expenditure in 2024 both support and help ensure such an outcome.
As was proved last year, predictions are a dangerous business. Still, SIG’s argument for investors is that the US’s unexpected performance as a safe haven in 2023 will not be repeated in the new year.