Sep 4 / Victor Arduin

Macroeconomics Weekly Report - 2023 09 04

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"So far consumer spending has helped economic activity to remain robust, given its substantial contribution of over two-thirds to US’ GDP. However, the saving rate dipped to 3.5% last month, signaling that household expenditures could drop in the Q3."

The Inflation Scenario Is Improving in the USA

  • The U.S. economy has recently demonstrated improvements in price trends, bolstering optimism that interest rates may not be raised again this year.
  • However, despite the currently elevated interest rates, their full impact on the economy has yet to be completely realized, potentially posing risks for the economy. 
  • In August, US’ manufacturing marked its 10th consecutive month of contraction. However, there are hopeful indicators that the pace of decline is moderating.
  • The collective credit card debt has surpassed the $1 trillion mark, raising concerns. However, when adjusted for inflation, this figure is more favorable compared to previous years.


So far, consumer spending has supported the expansion of US’ Gross Domestic Product (GDP), accounting for over two-thirds of the economy expansion. However, the recent decline in the savings rate to 3.5% in the last month raises concerns about potential reductions in household expenditures in the Q3.

The deceleration in economic activity is expected to prompt a more accommodative stance from the Federal Reserve, heightening the likelihood that interest rates will remain unchanged this month. Furthermore, job openings declined to their lowest level in almost two and half years in July, reflecting a gradual slowdown in the labor market.

The intense and rapid increase in borrowing costs, totaling 525 basis points over the past 17 months, has indeed yielded results in curbing inflation. However, despite the pronounced impact of these elevated interest rates, as evidenced by the slump in manufacturing activity, their full impact on the economy has not yet been fully realized.

Image 1: Total Debt Balance by Composition (Trillions of U$)

Source: Refinitiv

Image 2: Job Openings and Labor Turnover Survey

Source: Refinitiv

Restrictive monetary policy showing results

Price trends in the US economy have exhibited significant improvement. In August, the unemployment rate surged to 3.8%, while wage gains moderated, suggesting a potential easing in labor market conditions. This is a positive signal, especially considering that the tight employment scenario has been a source of concern due to its potential inflationary impact on the economy.

The intense and rapid increase in borrowing costs by 525 basis points over the past 17 months has resulted in lower inflation, bringing prices closer to the 2% target. However, despite this highly restrictive level, the full impact of high-interest rates has not yet been fully transmitted to the economy. An example of this is core inflation, which generally shows a lower sensitivity to monetary policy adjustments compared to overall inflation. Therefore, considering the transmission delay, interest rates should remain at this level for now.

Image 3: US Consumer Price Index (%)

Source: U.S. Bureau of Labor Statistics

Meanwhile, manufacturing experienced its 10th consecutive month of contraction in August, although there are signs that the rate of decline is improving. The index posted a reading of 47.6 percent, marking a 1.2 percentage point increase from July's figure of 46.4 percent, suggesting a potential stabilization at lower levels. The manufacturing sector, comprising 11.1% of the economy, has felt the impact of a significant 525 basis point increase in interest rates, affecting its performance over the past several months.

So far consumer spending has helped economic activity to remain robust, given its substantial contribution of over two-thirds to US’ GDP. However, the saving rate dipped to 3.5% last month, signaling that household expenditures could drop in the Q3. Also, there was a downward revision of GDP from the previous 2.4% figure to 2.1%. These developments have heightened expectations that the American central bank could achieve a soft landing.

Image 4: US PMIs

Source: Refinitiv

Debt escalating with high interest rates

Consumers are currently facing the challenge of elevated interest rates, causing some financial concern. The total credit card debt has exceeded $1 trillion, contributing to a cumulative household debt of $17.06 trillion Not only the rising debt, but the amount of cardholders who consistently keep negative balances from one month to the other also raises concerns. As per the US Federal Reserve, a substantial 60% of these cardholders have remained in debt for a year or more.

However, when accounting for inflation, credit card debt during the 2008 crisis was even more elevated. When we factor out the impact of inflation from the total amount, it shows that people are currently managing their debt more effectively than in the past. At present, the surplus savings are providing vital support for families grappling with soaring price levels.

Image 5: Household Debt vs. Treasuries Comparison

Source: Refinitiv

In Summary

Indications of a weakening labor market are a welcome sight for those concerned about the trajectory of interest rates in the United States. Despite the recent slight uptick in unemployment figures, some segments continue to display significant resilience, such as healthcare, restaurants, bars, and hotels.

Furthermore, wage growth has recently moderated in the United States. According to economists, the ideal pace of wage growth should be around 3.5%, as this figure does not exert upward pressure on the 2% inflation target.

Another factor that should favor the fight against inflation is the reduced savings of American households. According to a study conducted by the San Francisco Fed, the surplus savings accumulated from government transfer payments could be depleted in a matter of months.

The latest data suggests that the Fed is likely keep interest rates at their current level, as the economy has been displaying some signs of slowing down. While there are still risks of a rate hike before the end of the year, this risk is expected to decrease as higher interest rates continue to dampen economic activity, as evidenced by employment and manufacturing activity data.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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