Columna De Expertos The Second Half Economic Outlook for Importers and Exporters - From American Exceptionalism to Proliferation

The US remains exceptionalism despite high interest rates Despite the Federal Reserve raising interest rates at the fastest pace since inflation fighter Paul Volcker took over, the US economy is still doing well. US stocks are at record highs, and GDP growth is expected to be in the mid-to-high 3% range in the second quarter (according to the Federal Reserve Bank of Atlanta’s GDPNOW). Unemployment remains at historically low levels, below 4%, and consumption is robust. The US has been doing so well that there is even talk of American Exceptionalism.

On the other hand, there are concerns that tighter monetary policy will eventually have a staggered impact on the economy. It is pointed out that while the impact of raising interest rates may not be felt right now, the higher interest rates will eventually have a negative impact on the economy, bringing an end to American Exceptionalism. Will the US economy continue its strong performance in the second half of the year, after being the number 1 exporter of Korea for 20 years? 1. The Labor Market The US labor market is likely to remain stable in the second half of the year. The reason is simple. The labor market hasn't yet recovered from the post-COVID-19 tightness. The tightness of the labor market refers to the number of job openings per unemployed person. Historically, the US labor market was far from being tight, as there were more unemployed people than job openings. This creates competition for unemployed workers, allowing companies to hire the labor they need while keeping wages in check. And then, if the economy took a turn for the worse, they would immediately lay people off. In normal times, there were more people than jobs, so when things got tough, they would lay people off and then hire them back when things got better.

In this employment situation, even a slight downturn in the economy can cause a surge in layoffs and a spike in unemployment. We mentioned earlier that in the US, spikes in unemployment lead to consumption shocks and then recessions, so when you have a loose labor market, you have to be constantly vigilant about when it might suddenly slip into a recession.

But right now, the US is doing the opposite. There are 1.3 to 1.4 job openings for every unemployed person, meaning that there are more jobs than unemployed people, the opposite of what we've seen in the past. What's surprising is that it's gotten better. In the first half of 2022, when the US economy was at its peak, the ratio was as high as 2.0, meaning that unemployed people had two jobs to choose from.

In this situation, a slowdown in the economy does not cause a sudden rise in unemployment. This is because the disconnection between the unemployed and job openings acts as a buffer zone.

2. Excess Savings There's another buffer zone that the US economy can rely on: excess savings. Since COVID-19, the US government has been printing money like crazy, which has caused the savings rate to rise in a deformed way, which we call excess savings. But we've heard a lot of stories about Americans spending these excess savings. It depends on how you look at it, because Americans love to spend, and they've spent all that excess savings. Today, I'd like to address that.

The commonly accepted methodology for calculating excess savings is as follows. Assume that the upward trend in the savings rate in the four years prior to the pandemic is the level of savings growth that will continue to occur in the US going forward. This is then taken as the post-COVID baseline savings rate. Now compare this baseline savings rate to the actual savings rate. If actual savings are higher than the baseline savings, we add a positive number to the excess savings, and if they are lower, we add a negative number to the excess savings.

A variation of this is to use the maintenance type, where the baseline savings rate is 6.2%, the average of the pre-COVID-19 period. If we calculate the excess savings under this assumption, we get the following result. We still have a lot of excess savings.

Of course, this notion of excess savings is a new post-COVID-19 assumption, so it's not a perfect calculation. But it's clear that the well-known methodology is fatally flawed, and we need to take into account that US households may still have more leeway than we think. In addition, this excess savings will act as a buffer in US consumption, much like the buffer that still remains in the labor market. 3. Disinflation Higher-than-expected inflation in the first quarter of 2024, especially in January, has raised concerns about a resurgence in inflation, which has impacted the Fed's rate cut timeline. However, the key leading indicators for inflation suggest that further disinflation(slowdown of inflation) is more likely.

Next is the trend of core CPI and job openings. The core CPI includes services, which is a sector that is heavily influenced by wage growth. Therefore, the strength of the labor market is a leading indicator of core inflation. Here's a graph that assumes that job openings lead core inflation by six months. The slope is not as sharp as it was at the beginning, but it points to further stabilization.

Housing costs tend to follow closely behind housing. This is because, due to the characteristics of rental contracts, the impact of new rents on inflation occurs sequentially. Here's a graph of CPI housing costs plotted against house prices, lagged by 15 months. We can expect further declines in housing cost growth in the future. While house price growth has recently picked up again, it's only about as high as the average before the pandemic. What the Fed needs is disinflation, not deflation. From US exceptionalism to proliferation With the US being so supportive, it is now possible that the warmth will spread globally. The biggest reason is that countries are finally able to use monetary policy that suits their circumstances. Until now, the US has been raising rates at such a steep pace that other countries have had no choice but to adopt tightening policies. But now, the US has entered a phase where the focus is on when to lower rates. Once the US is in this phase, other countries will be able to have some room to breathe. This is because countries can revert to easing monetary policy based on their own circumstances.

The fact that inventories have been well adjusted is also a factor in the expectation of a global expansion. When the post-COVID-19 economy turned out to be better than expected, companies furiously placed new orders. But then the economy suddenly slowed, and all of those orders became excess inventory. For the next two years or so, US companies worked hard to shed the dead inventory, and as a result, real inventories, adjusted for inflation, have finally fallen below the pre-COVID-19 inventory trend line, meaning that the overstocking is over.

This means that exports are more likely to rebound further, and on a product-by-commodity basis, the rebound in exports could spread from certain categories to others.

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