The Unloved U.S. Economic Expansion
The U.S. economy is charging ahead. Few are happy about it.
According to the “advance” estimate from the Bureau of Economic Analysis, U.S. GDP expanded at a blistering 4.9% annual rate in Q3, a significant jump from the pace set in the first half of the year. A strong labor market and rising wages continue to bolster consumer spending, which has remained resilient all year. Q3 output was also boosted by increases in private inventory investment, government spending, and exports.1
All told, the U.S. economy has recovered fully from the pandemic, and the current unemployment rate of 3.8% is just a tick higher than it was in January 2020, before the pandemic hit. Monthly payroll growth has averaged 258,000 per month over the past year, with average hourly earnings rising 4.1% year-over-year in October. Since inflation as measured by the headline PCE price index came in at 3.4% year-over-year in September, the takeaway is that Americans are seeing “real wage growth.” Indeed, real disposable income rose 3.0% during the first nine months of the year.
Americans are earning more, the economy is growing, and household net worth has surged. From the end of 2019 through the end of Q2 2023, household net worth rose $37.6 trillion, a 37% increase even when adjusted for inflation. That’s the fastest surge in new wealth ever recorded.
It’s clear, in my view, that by most fundamental measures, the U.S. economy is in solid shape. But many Americans don’t feel very good about it.
In October, measures of consumer confidence and consumer sentiment both fell, marking three consecutive months of souring on the economy. The Conference Board’s index of consumer confidence fell to 102.6 in October, returning to levels last seen in late 2022 (which, recall, was a year of rising interest rates and a bear market). Consumer confidence metrics fell across a broad range of categories, spanning consumer outlooks for income, business, and employment. The University of Michigan consumer sentiment index has also been bouncing around relatively low levels, as seen on the chart below:
The University of Michigan consumer sentiment index is essentially at levels consistent with recession, yet the economy is nowhere near contraction territory. One key explanation for the disconnect is inflation. In the University of Michigan’s survey, 40% of respondents said they felt worse off because of inflation.
We know inflation has been locked in a downtrend, but the issue in times of rising prices and rising wages is that consumers focus far more on prices. We also know that while the Federal Reserve is focused on inflation’s rate of change, consumers tend to focus more on how much things cost nominally. With inflation’s surge in 2022, the prices for everything from food to clothing to concert tickets reset to higher levels, which bothers consumers on an ongoing basis. While it’s true prices are no longer rising as quickly as they were last year, they are permanently higher – a reality that consumers don’t frame in the context of their wage gains.
From a purely economic and investment standpoint, however, there’s a lot to be optimistic about, in my view. The fundamentals I mentioned above are no doubt strong, with growth and inflation both improving in the third quarter. And the fact that sentiment remains at a relatively low point might also be framed as a positive. Stocks tend to do well historically when economic fundamentals are under-appreciated, or when investors are more worried or pessimistic than they should be. I see both of those conditions today.
Bottom Line for Investors
Focus on the fundamentals. The financial media and sentiment indexes will often paint the picture that there is a lot to be worried about, whether it’s geopolitical conflict, inflation, domestic political issues, and so on. These issues matter, of course, but arguably not as much as the media says they do. U.S. economic fundamentals matter more, as do corporate earnings trends. And for now, both are heading in the right direction.
Disclosure
2 Fred Economic Data. October 27, 2023. https://fred.stlouisfed.org/series/UMCSENT#
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