Since the beginning of this year, the U.S. economy has not experienced the recession expected by the market, but has maintained rapid growth. However, this is contrary to the deterioration of some data indicators. Some people believe that the US data is suspected of “falsification”. In order to understand reality objectively and accurately, we must first avoid preconceived conclusions.
In fact, the current U.S. economy shows certain characteristics of recession, that is, different industries have alternately weakened under the pressure of the Federal Reserve’s continued interest rate hikes, but the overall economy has remained at a relatively stable level. This exactly explains the contrast between weaker US data and stronger growth. Compared with last year’s widespread expectations that the U.S. economy was about to “hard landing,” the U.S. economy has indeed shown considerable resilience.
Non-manufacturing PMI continues to expand
Since 2023, the U.S. manufacturing PMI (Purchasing Managers Index) has been below 50 for nine consecutive months, indicating that U.S. manufacturing activity continues to shrink. The corresponding question is, why is the manufacturing industry continuing to shrink while the U.S. economy can still grow relatively quickly?
Since the second half of 2022, as the Federal Reserve continues to raise interest rates, the impact of the COVID-19 epidemic on the supply chain has basically disappeared, and the structural changes in U.S. residents’ consumer demand have shifted from goods to services, U.S. manufacturing companies have begun to shift to destocking, adding to corporate borrowing costs. rose, and ultimately U.S. manufacturing activity continued to shrink. Although U.S. manufacturing activity continues to shrink, tight labor markets and rising wages have led to continued expansion of service industry activities, which supports overall U.S. economic growth. In the first half of 2023, U.S. household consumption of goods increased by 3.2% year-on-year, while service expenditures increased by 8.2% year-on-year.
From the perspective of industrial structure, the U.S. service industry accounts for about 80% of GDP (gross domestic product), while manufacturing accounts for only about 10% of GDP. As a result, the boom in services more than offset the downturn in manufacturing. In the first nine months of 2023, the U.S. non-manufacturing PMI has continued to be higher than 50, and service industry activities have been relatively strong; the U.S. comprehensive PMI, including non-manufacturing and manufacturing, has also been higher than 50 for the past seven consecutive months. This is also It confirms that overall economic activity still tends to expand.
Residential electricity consumption and industrial electricity consumption weakened
Judging from historical data, although the year-on-year growth rate of U.S. electricity consumption and the year-on-year GDP growth rate have a certain positive correlation in trend, in many short periods of time, the positive correlation between the two is not significant, or even significantly negative.
Judging from the recent situation, U.S. electricity consumption fell by 3.5% year-on-year in the first half of 2023, of which residential electricity consumption, commercial electricity consumption, and industrial electricity consumption decreased by 6.8%, 0.9%, and 2.2% year-on-year respectively. Based on the proportion of the three types of electricity consumption, electricity consumption in the first half of the year dropped by 3.5 percentage points year-on-year, of which the decline in residential electricity consumption contributed 2.5 percentage points and the decline in industrial electricity consumption contributed 0.6 percentage points, which explains 3.5 percentage points. 3.1 percentage points of the percentage point decrease.
As the contribution rate shows, residential electricity consumption has the largest decline among the three types of electricity consumption. However, judging from historical data, its relationship with the economic cycle is not significant. In fact, it is mainly highly related to temperature fluctuations. The negative growth of industrial electricity consumption is highly related to manufacturing demand, and the trend can be highly consistent with the manufacturing PMI.
The decline in imports was affected by the improvement of the supply side and changes in the consumption structure.
In the first half of 2023, the year-on-year growth rate of U.S. imports dropped to -4.3%, while the year-on-year GDP growth rate remained at a relatively high level of 2.1%. There were obvious differences between the trends of import growth and economic growth. This can be observed from the supply side, and can also be understood from the changes in the consumption structure of American households on the demand side.
On the supply side, since 2023, the impact of the COVID-19 epidemic on the supply chain has basically disappeared, and the impact of the Ukraine crisis has gradually been partially digested. Therefore, supply-side improvements have led to a decline in U.S. imports to a certain extent. On the demand side, important changes have taken place in the consumption structure of U.S. households, which has led to a decline in the proportion of imports in U.S. consumption. In the first half of 2023, imports accounted for 7.0% of U.S. household consumption, down from 7.8% in the first half of 2022.
During the same period, U.S. household consumption of goods increased by 3.2% year-on-year, while service expenditures increased by 8.2% year-on-year. This is mainly due to the fact that the consumption structure of American households has gradually shifted from the stay-at-home economy (more consumption of manufactured goods) during the epidemic to the social economy (more consumption of services) in the post-epidemic period.
The number of bankruptcies of large enterprises increased, but the number of bankruptcies of all-round enterprises was low
According to corporate bankruptcy data compiled by S&P Global, a total of 340 large and medium-sized companies in the United States have filed for bankruptcy protection, a record high since 2010. The bankruptcies of large and medium-sized companies do reflect that high interest rates have put greater pressure on the operations of some companies, but we still need to observe the U.S. economy accurately and comprehensively.
The S&P statistics only cover some of the larger companies, but this is not the whole picture. Looking at the overall corporate situation in the United States, data from the Administrative Office of the U.S. Courts shows that in the first half of 2023, there were approximately 220,000 bankruptcy filings nationwide. Although there has been an increase, it is still significantly lower than the pre-epidemic level. This statistic has the broadest scope and can more comprehensively reflect the financial status of businesses and individuals in the United States.
Judging from the overall leverage ratio of U.S. non-financial companies, in the first quarter of 2023, the ratio was 77.2%, a decrease of 0.5 percentage points from the previous quarter. From the perspective of financial conditions, in the week ending September 29, 2023, the corporate financial pressure announced by the St. Louis Federal Reserve was -0.55, which is lower than zero, which indicates that the current financial pressure of U.S. companies is even less than the historical average. It has been more than a year since the Federal Reserve raised interest rates, but U.S. companies have yet to fully feel the financial pressure brought by high interest rates. An important reason is that there is a time lag in the transmission of monetary policy (which involves another issue that needs to be discussed).
Federal tax revenue decreases mainly due to tax incentives
In the first half of 2023, the U.S. federal government’s tax revenue fell by 11.8% year-on-year, of which personal tax revenue fell by 13.4% year-on-year, and corporate tax revenue fell by 1.9% year-on-year. Why will the U.S. economic growth be strong in 2023, but federal tax revenue will decline year-on-year?
Among them, personal income tax accounts for about 80% of the U.S. federal government’s tax revenue. The decline in personal tax revenue has driven the federal government’s tax revenue down by nearly 11 percentage points, which explains almost the entire decline in tax revenue. Therefore, it is critical to understand the real reasons for the decline in U.S. personal tax revenue. Especially in the first half of 2023, the unemployment rate in the United States is as low as 3.5%, and the average hourly wage of employees in the private non-agricultural enterprise sector has increased by as much as 4.4% year-on-year. This further conflicts with the year-on-year decline in U.S. personal tax revenue.
The real reason behind this is: under the inflationary situation, U.S. tax policy has taken important adjustment measures. In 2023, the United States implemented the latest tax inflation adjustment policy, and the tax standard deduction increased by approximately 7%. In addition, the IRS also announced changes to personal income tax brackets and increased the thresholds for tax brackets, which will allow people whose wages are growing slower than inflation to pay less tax.
Although the IRS adjusts tax returns every year based on inflation, because the U.S. inflation rate in 2022 hit a new high in nearly 40 years, the U.S. tax adjustment that year was particularly large. In other words, the decline in personal income taxes in the United States is actually another form of continuation of fiscal expansion policies, from direct payments to the household sector in the early stages of the epidemic to the current differentiated tax cuts and improved income distribution.
After clarifying the contradiction between some economic indicators and economic growth in the United States, we can at least draw the following conclusions or revelations: First, due to the transition from the stay-at-home economy during the epidemic to the social economy during the post-epidemic period, the U.S. economy this round has shown ” The new feature of rolling recession is that the manufacturing industry (accounting for about 10% of the U.S. economy) is facing greater downward pressure, so imports are weak and electricity consumption is declining. However, with the support of the service industry, the overall economy is still relatively strong. This has enabled the service industry (which accounts for about 80% of the U.S. economy) to have stronger performance, stronger employment, and faster economic growth. Second, with the risk of economic recession reducing, the US easing policy is still continuing in different forms. Policies such as adjusting taxes according to inflation can help improve income distribution and reduce the pressure on low-income earners, which explains the reasons behind the decline in tax revenues.
Overall, the fall in inflation shows that the overheating of the U.S. economy is receding, the contradiction between supply and demand is easing, and the economy is returning to normal. However, it remains to be seen whether this process of rediscovering balance will be smooth sailing. Will the recent strikes by workers at the three major U.S. auto companies spread further, and will the recent geopolitical conflicts in the Middle East cause oil prices to continue to rise? Will China’s economic recovery speed up? Will these factors make the high inflation in the United States last longer and make the process of interest rate cuts longer? Will rolling borrowing and bond issuance of maturing private sector debt face a rapid rise in financing costs? As holders of the Treasury bond market become more sensitive to bond prices, the proportion of AAA corporate bonds continues to decline, and the proportion of junk bond companies remains high, will the volatility of the U.S. financial market increase? These factors may become important factors affecting the future direction of U.S. monetary policy and economic trends.