Summary
- The International Monetary Funds estimates that Advanced Economies will be slipping in growth, with the United Kingdom witnessing contraction.
- New survey trends by PYMNTS indicates that an increasing number of people earning over $100,000 are living paycheck to paycheck.
- With falling wage growth rate and the bulk of employment being in adversity-sensitive small businesses, the forward consumption outlook is fraught.
In its "Global Financial Stability Report" released in October 2022, the International Monetary Fund ((IMF)) had originally estimated that economic conditions in the U.S. and Eurozone would be "reverting to the mean" somewhat faster than in the Emerging Markets ((EM)) countries. On the 30th of January, it released an update .
In the update, the IMF highlights that the market expects the policy rate hike cycle to have an accelerated cycle of easing in the latter half of 2023. However, it bears noting that this, by no means, can be construed as meaning that there will necessarily be an easing of recessionary conditions: most "pivots" on rate hike regimes have been followed by a strong bear market in the S&P 500 ( SPX in index form and SPY in ETF form) over the last fifty years .
The IMF also made a number of interesting updates about global macroeconomics:
- India will lead economic growth worldwide for at least two years, closely followed by China . Overall, its an era of growing prosperity for Low-Income Developing Countries as well as Emerging Market and Middle-Income Economies.
- While virtually every advanced economy (i.e., the U.S., the Eurozone, Canada, the U.K. et al) will struggle to grow over the next year, only the U.K. is expected to contract in 2023 and bounce back with growth in line with other advanced economies in 2024.
- Oil and commodities are expected to have a substantial shrinkage in prices over the course of 2023, which will carry over to some extent in 2024. If true, this will (of course) bring some relief to the average consumer.
The growth of India is an interesting paradigm. Unlike China, India is by no means a crucible for manufacturing goods destined to be consumed in the Western Hemisphere. Like India, large swathes of the economies in Low-Income, Middle-Income and Emerging Market countries do not subsist on exports to the Western Hemisphere either. China's growth in the nineties was largely fueled by the shift in manufacturing from the West to the East. In the era of "globalization," the U.S. effectively became the "prime consumer" while China became the "prime producer." As some contrarian economists had concluded circa Q4 2022, globalization is effectively under pressure while localization is growing. All in all, it's very likely that we shall witness some very interesting evolutions and alignments in both geopolitics and macroeconomics over the course of this decade.
Note: The ongoing advent of localization isn't a new phenomenon. This inevitability was outlined in an article written in October 2021 and has been highlighted as being the opinion of many macro analysts in another article in November 2022 .
This update is rather interesting given that it's from an institution that effectively has "skin in the game" in global geopolitics and macroeconomics which is a little different from that of, say, an investment bank or a financial services firm. The latter do have some interest in downplaying market risks to retain transaction volumes which, in turn, generates revenues. While it would be unfair (and impossible) to state that their forecasting is compromised, an "understating" of market-adverse events is a natural assumption for one to make. Of course, it bears remembering that neither set of forecasters have been right 100% of the time.
Lowering consumption patterns in the "prime consumer" - the U.S. - has been imputed for sometime now. Those with "skin in the game" in consumption are the likes of digital payments firms and credit providers. The results of a survey as of December 2022 jointly conducted by payments and commerce platform PYMNTS as well as credit provider LendingClub Bank (whose parent corporation is LC ) was released near the end of January 2023, which uncovered some very problematic consumption patterns in the U.S.
The survey has been conducted periodically over a number of months since mid-2021 and indicates a troubling pattern: an increasing number of people earning above $50,000 are reporting that they're now living "paycheck to paycheck," i.e., with no substantial savings put aside either as investments or in the form of spare cash after necessary expenses are accounted for.
The income brackets could broadly interpreted thus: those making less than $50,000 could be considered "working-class" while those making between $50,000 to $100,000 could be considered "middle class" or "lower-middle class" (depending on region in the U.S.). Similarly, those making above $100,000 can be considered "middle-class" or "upper-middle" class. The survey indicates that that the increase in the proportion of "working-class" people reporting living paycheck to paycheck is nearly half of that reported by "lower-middle class" or "upper-middle class."
Further depth to this picture is added by the survey's findings that, overall, a fewer share of survey respondents report living "paycheck to paycheck" as compared to December 2020.
However, despite this fall, those most affected are the two "middle class" categories. One interpretation for this would be that the "working class" has likely been gearing down from being a dominant buyer of goods and services since 2021 with momentum in purchasing trends effectively being relegated to the two "middle classes." In 2022, even these two categories were under pressure as of 2022.
Even further color is being imparted in overall purchasing decisions in 2022 versus 2023:
Nearly half of all respondents indicated that they didn't purchase new vehicles or expensive items in 2022 and have no plans to do so in 2023. Interestingly, the tendency for those who did make some expensive purchases in 2022 and aren't planning to do so in 2023 doesn't seem to have a significant differential on the respondents' personal circumstances, i.e., whether they were single or had a partner or whether they had children or not.
The survey highlights an interesting opinion among the respondents: they were predominantly hopeful that 2023 will be a better year. This opinion might or might not have added some contours to the findings which, on balance, comes across as rather grim. With the rate of wage increases showing a slowdown, as per latest statistics :
and small businesses (which generally tend to be inflation/slowdown-averse) holding up the employment statistics by hiring more people than those fired by large corporations:
Source: Visualization by Wall Street Journal based on data from Jefferies and Bureau of Labor Statistics
the prospect of additional capital being unlocked for spending is rather diminished for at least the course of this quarter (if not longer).
In Conclusion
The prospect of commodity prices easing, while being a relief to consumers, would likely provide some impetus for the cooling off of valuations in value stocks such as energy companies and minerals providers. The overall forward outlook for the case for a sustained bullish equity market valuation is, of course, not helped by the fact that an increasing number of high-value investors are likely shifting to money-market funds .
Source: Visualization by Wall Street Journal based on data from EPFR
All in all, it pays to be cautious and diversified while accepting the idea that there might not be a lot of long-term stock positions that would generate inflation-busting returns this year. For the experienced tactical player using leverage and short-term patterns, 2023 might prove to be an interesting target-rich environment.
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IMF Updates Economic Forecast, U.S. Middle Class Under Increasing Pressure