CAI MENG/CHINA DAILY
The United States economy has been on a strong recovery path since the start of the year, and according to Federal Reserve forecasts, US GDP in the third quarter could reach 5.6 percent annual growth from a year ago, the highest expansion in almost 20 years.
There are certainly many driving forces behind such a strong upward trend. But for us, the fundamental logic behind the revival of the US economy arises from the staggered transformation of the growth dynamics of the US economy in its business cycle. In 2021 and 2022, economic growth was largely driven by consumption – mainly durable goods – and investment in non-residential real estate. As we enter the second half of 2022 and the third quarter of this year, services consumption and residential real estate investment continued to contribute to further acceleration of the US economy.
From a spending perspective, while the Fed’s continued interest rate hikes have pushed the federal funds rate to record highs, excess household savings have supported private consumption spending to maintain strong levels of growth. At the same time, due to the lack of existing housing inventory, home buyers are shifting their focus to new homes, accelerating the growth rate of housing investment.
By our calculations, real estate and related sectors contribute nearly 20 percent of U.S. GDP. In addition, the US reindustrialization strategy has gained momentum over the past two years as the global supply chain has gradually emerged from the shadow of issues such as the COVID-19 pandemic, which has supported non-real estate investments, particularly in manufacturing investments to maintain steady growth.
According to the US government, the contribution of private consumer spending to economic growth in the third quarter is expected to be over 50 percent, which corresponds to quarterly growth of 2.9 percentage points. Inventory investments followed with an increase of 1.31 percentage points. Non-residential fixed investment may contribute another 0.47 percentage points, while residential investment may turn positive during the period, with its contribution rate estimated at 0.27 percentage points.
Turning to industrial data, the US saw continued retail sales growth in the second and third quarters, with consumption of consumer goods and services continuing to gain strong momentum. Among them, food and catering, cultural and sports entertainment, apparel and healthcare all performed better than expected. However, durable goods consumption has been generally negative since July.
In the real estate sector, the U.S. housing market has rebounded beyond analyst expectations on a monthly basis, and new home sales hit a nearly 17-month high in July, confirming the imbalance between supply and demand in the U.S. real estate market still exists .
The numbers above actually show that the US economy has peaked. However, they also indicate an imminent downward trend. First, support for private consumption spending from excess U.S. household savings is waning. In fact, this area’s contribution has already slowed slightly since the second quarter. However, due to the rapid decline in US inflation since the second quarter, some inflationary pressure has been released and this may not be so obvious since the small supportive effect of excess savings on consumption is hedged by the decline in inflation.
Additionally, we estimate there was still $1 trillion in excess U.S. household savings at the end of the first quarter. A total of $700 billion was consumed in the second and third quarters. However, taking into account the Treasury’s monthly financial transfer support to households, households are still expected to have $600 billion to $700 billion in excess savings by the end of the third quarter. These excess savings are expected to be exhausted in the second quarter of next year, but the negative impact on consumption expectations is expected to be reflected at the end of the fourth quarter of this year and in the first quarter of next year.
Second, while we expect a rebound in U.S. residential real estate investment, we do not expect a long-term upward trend for real estate investment. In fact, the contribution of housing investment to U.S. GDP was negative through the third quarter, and the fact that this contribution turned positive in August reflects the volatile impact of housing inventory problems on housing investment.
Although the current sluggish housing inventory situation in the United States has accelerated new home sales and restored confidence in housing investment, the increase in housing inventory due to the implementation of the Housing Act is expected to begin to support growth by the end of the year To dampen residential real estate investment Supply action plan implemented by the current US administration.
On the other hand, US mortgage interest rates have reached a new high and the willingness to buy on the real estate market has been suppressed from the demand side. Historically, the U.S. housing cycle is highly correlated with household credit cycles, and if the corporate and residential real estate sectors fail to experience credit expansion in the short to medium term, it will be difficult for real estate investment to rely on supply-side support to sustain a prolonged period of expansion. Therefore, we expect that the contribution of residential property investment to the economy could decline rapidly once the supply of existing housing stock recovers in the short to medium term.
Last but not least, the contribution of non-residential real estate investment to GDP is limited. Although the U.S. manufacturing sector will enter a new round of replenishment cycle in the medium to long term, coupled with industrial policy support as U.S. reindustrialization continues, high-end manufacturing is likely to experience strong growth. However, we must say that the driving force of manufacturing investment may be limited, as it recently accounts for 18 percent of non-residential real estate investment and 5 to 10 percent of total private sector fixed investment, while private sector fixed investment contributes 15-20 percent of GDP. Therefore, even if manufacturing investment enters a boom cycle in the short to medium term, the contribution to real GDP will still be limited, which is expected to increase GDP growth by only 0.2 to 0.4 percentage points.
As for US employment, we have seen that the non-farm employment data for August is actually not bad, while the actual situation still needs further review based on the September performance. Since April, the final value of non-farm data has been revised downwards several times in a row, and the frequency of data collection on business employment has also slowed, which could be a sign of a slowdown in the labor market. When such an issue is considered in conjunction with other indicators such as wage growth, the labor force participation rate and the final unemployment rate in the US, it suggests that the US labor market may be showing signs of a downward trend.
The authors are Cheng Shi, chief economist at ICBC (Industrial and Commercial Bank of China) International, and Zhang Hongxu, senior economist at ICBC International.
The views do not necessarily reflect those of China Daily.
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