The United States is borrowing its way to disguise recession.
The headline economic figures for the United States look robust. However, details show concerning weaknesses.
Real GDP growth surged to 4.9% in the third quarter, above the consensus estimate of 4.5%. However, some analysts, including Bloomberg, expected up to 5% growth based on the nowcast estimates.
United States unemployment is also low, at 3.8%, but real wage growth remains negative, according to the Bureau of Labor Statistics. Between September 2022 and the same month of 2023, the decrease in real average weekly earnings was 0.1%. This means that a tight labor market is not improving the real disposable income of workers. Additionally, the labor participation rate and employment-to-population ratio remain below pre-pandemic levels. Add rising taxes to inflation, eating away at wage growth, and you can see why things are more complicated than what headlines suggest.
The cracks in the bullish story will appear soon. Consumer spending grew at a strong 4.0% annualized rate in the third quarter, which surprised most analysts after a weak 0.8% in the previous reading. The worrying fact is that this rise in consumption comes mostly from higher debt, as United States consumers are borrowing heavily to spend on entertainment. The rise in services was 3.6%, while real disposable income is negative (-0.1%) and household credit card debt reaches a new record. Unsurprisingly, credit card debt rose to a new high of more than $1 trillion, with the average consumer running a $5,900 debt on their card, according to the Federal Reserve Bank of New York. Last year, credit card interest rose to $105 billion, and this year will be much higher.
Americans are living on borrowed time as real salaries remain in negative territory in the past five years and inflation eats savings away. This may last, but not much.
More concerning figures in GDP: A strong economy does not show a decline in investment of this magnitude. Nonresidential business investment fell 0.1%, including a 3.8% slump in equipment investment. According to Morgan Stanley, capital expenditure plans have fallen to May 2020 levels.
The mirage of construction is also gone, as it fell to just 1.6% after a one-off double-digit increase in the past quarter. Furthermore, a large part of the growth in GDP came from bloated government spending financed with more debt and inventory revaluation, adding 0.8 and 1.4 percentage points to GDP growth. Many of these temporary effects will revert in the fourth quarter.
The level of public debt is exceedingly concerning. The increase in gross domestic product between the third quarter of 2022 and the same period of 2023 was a mere $414.3 billion, according to the Bureau of Economic Analysis, while the increase in public debt was $1.3 trillion ($32.3 to $33.6 trillion, according to the Treasury).
The United States is now in the worst year of growth, excluding public debt accumulation since the thirties.
Consumption financed by soaring credit card debt and economic growth disguised by enormous government spending and record public debt are not indicators of a strong economy but proof of a very worrying trend that may last another two quarters but will likely result in a much weaker economy in the next three years.
