The U.S. economy has already sustained a soft landing, according to Michael Arone, chief investment strategist and managing director at State Street Global Advisors, during the Canadian Investment Review’s 2024 Investment Innovation Conference.
The U.S. economy saw 4.9 per cent annualized growth in gross domestic product in the third quarter of 2023, he said, highlighting the increase from 2.8 per cent in the third quarter. In addition, the unemployment rate in the U.S. hit a low of about 3.4 per cent but is now sitting at roughly 4.1 per cent. And inflation continues to trickle down towards the two per cent target.
While the economy has cooled, it isn’t in recession territory, said Arone. Indeed, despite doom and gloom headlines, he noted the typical U.S. consumer is in pretty good shape. “Those [who] are in the top 20 per cent of income earners are responsible for 40 per cent of U.S. spending. In the U.S., two-thirds of GDP is driven by consumption.”
Read: Infrastructure bank to invest $10 billion in priority areas for pandemic recovery
That top 20 per cent of income earners are fully employed, he said, noting their wages are growing by five per cent above the rate of inflation. “They own 85 per cent of the stocks, 80 per cent of the bonds. They own two-thirds of the money market instruments, the liquid assets that are now yielding four per cent plus above the rate of inflation. They’re only responsible for one-third of credit card balances. So those folks are in good shape.”
On the other hand, Arone acknowledged the bottom 60 per cent of income earners are suffering more from rising grocery and home prices. This group is also less likely to own their homes or any stocks. Nonetheless, while consumer liabilities have increased by about 30 per cent over the last few years, he pointed out that their assets’ values have also increased in terms of the stock market and home prices along with other household wealth.
U.S. companies are in good shape, he said, noting more than 90 per cent of the S&P 500 reported third quarter earnings growth of more than five per cent. “That’s above what we expected at the end of September. Profit margins are north of 12 per cent. That’s among the highest we’ve ever seen. And forecast for next year is even better. Earnings growth for next year is expected to grow by almost 15 per cent.”
Read: Mild U.S. recession expected mid-2024, inflation to slow significantly: report
The past two years have been a bull market for investors and that market dynamic is poised to continue for at least another four years, said Arone. However, he also noted the market rate may be underestimating the potential for higher rates and stickier inflation. “The U.S. didn’t do a good job managing its balance sheet when rates were low.”
With a $1.8 trillion deficit, coupled with slowing GDP growth and a creeping unemployment rate, the U.S. will have to issue massive amounts of treasuries to support that deficit and it will have to do that at higher costs.
“So far, the treasury has been able to do it by reverse repurchase agreements and short-term financing. . . . Interest cost in the U.S. will now be greater than defence spending. And the U.S. spends $900 billion roughly a year on defence spending.”
Read more coverage of the 2024 Investment Innovation Conference.