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How Will the U.S. Economy Develop in 2024? - Huxiu#

#Omnivore

Highlights#

Ultimately, increasing government leverage, spending more on the public, curbing large corporations, enhancing government discourse power, rebuilding national consensus, and uniting the state with low-income groups to jointly curb high-income groups and multinational corporations may be the solution for the U.S. to address political polarization and de-globalization in the 2020s and even the 2030s. ⤴️ ^f1ce1920

This article analyzes the development prospects of the U.S. economy in 2024. It points out that the U.S. economy faces long-term contradictions, including challenges of political polarization and de-globalization. In terms of short-term contradictions, the article discusses the impact of factors such as interest rates, credit/loans, and fiscal policy on the U.S. economy. It also focuses on the synchronous indicators of the U.S. economy, including the outlook for consumption, investment, and government spending. Finally, the article mentions inflation and unemployment rates as lagging indicators affecting the U.S. economy.

• 💰 The U.S. debt issue is primarily about devaluation rather than default, with long-term contradictions stemming from political polarization and de-globalization pressures.

• 📉 The short-term contradictions in the U.S. include the impacts of interest rates, credit/loans, and fiscal policy, with potential growth in fiscal spending in the future but with uncertainties.

• 🏠 U.S. mortgages will not stall, but the depletion of excess savings and rising unemployment rates may put pressure on consumer spending.

Most of the knowledge we learn from books is about black-and-white judgments, but the vast majority of choices in life occur in shades of gray. Therefore, identifying black-and-white knowledge is often simple, while choosing the correct one between two shades of gray requires not only knowledge but also the courage to act and choose, the ability to pursue ambiguous correctness, and perhaps most crucially, luck.

I have divided next year's economic and market outlook into several parts for two reasons: first, because writing it all together makes it too long and cumbersome for readers; second, by breaking it down into sections, I can also take a few more days off.

We will start with the U.S. economy, followed by the Chinese economy, the economies of Europe, Japan, and emerging markets, and then discuss the outlook for commodities and stock prices.

In the section on the U.S. economy, we will discuss three levels of issues:

• Long-term contradictions in the U.S. economy;
• Short-term contradictions in the U.S. economy;
• Specific situations analyzed in detail.

Without further ado.

I. Long-term Contradictions in the U.S. Economy: When Political Polarization Meets De-globalization

The long-term contradiction in the Chinese economy is the debt pressure faced in the context of de-globalization. The debt structure in the U.S. is different from that in China; in China, the leverage ratio of the household sector is high while that of the central government is low, whereas in the U.S., the leverage ratio of the household sector is low while that of the central government is high.

Individuals face credit risk and debt rollover pressure, so China's debt issue is primarily about credit, while the U.S. debt is more about government bonds, meaning that their debt issues do not involve considerations of default but rather of devaluation. In other words, the concern regarding China's debt is about rollover and whether the existing stock can be maintained, while for the U.S., the concern is about currency value. Thus, the U.S. debt issue is not their long-term contradiction.

The real long-term contradiction for the U.S. is that they are also experiencing an unprecedented major change in a century, and it is happening in two aspects: one is the highest degree of political polarization in a century, and the other is the highest degree of de-globalization in a century.

The pressure of political polarization leads to less cooperation, more government-level disagreements, and more difficult-to-reconcile class and ethnic conflicts. A century ago, the last instance of political polarization in the U.S. coincided with the retreat of globalization, leading to the emergence of the Progressive Movement, a very referable period. In previous articles, we introduced the characteristics of the U.S. during this time:

• Anti-monopoly;
• The working class began to fight for more power;
• Isolationism and conservatism began to rise.

For the U.S., the pressure of de-globalization is the opposite of what it was a century ago. A century ago, the U.S. was still an emerging manufacturing power, encouraging globalization; a century later, the U.S. has become a consumer economy, and de-globalization comes at the cost of inflation, suppressing emerging economies.

Thus, when the U.S. in the 2020s faces political polarization combined with de-globalization, it results in anti-monopoly under inflation, with high-income groups and industries benefiting from globalization facing more economic and political pressure, while low-income groups begin to see wage growth. For the government, due to reduced consensus from polarization, there must be more actions to flatter the public, or rather, only expenditures that consolidate public consensus are more likely to pass.

==Ultimately, increasing government leverage, spending more on the public, curbing large corporations, enhancing government discourse power, rebuilding national consensus, and uniting the state with low-income groups to jointly curb high-income groups and multinational corporations may be the solution for the U.S. to address political polarization and de-globalization in the 2020s and even the 2030s.==

When you later analyze the Chinese economy, you will find that there is actually no essential difference in what China and the U.S. are doing; the only difference lies in the different starting functions.

Thus, I strongly agree with the U.S. Treasury's own view that for many years to come, the deficit rate will not decrease, and in the face of a major crisis, it will rise sharply.

The above are long-term views, and the conclusion for the short term is simply this: Do not expect future U.S. fiscal spending to decrease; it may be that for many years to come, fiscal spending will be more likely to rise than fall.

II. Short-term Contradictions in the U.S. Economy: Election Year, Can Loose Fiscal Policy + Tight Monetary Policy Continue?

The connection with long-term contradictions lies in how we should view U.S. fiscal spending in 2024.

When I study economic issues, I place great importance on leading indicators, which are liquidity issues, as they are the starting point for all problems.

Leading indicators - Synchronous indicators - Lagging indicators.

This is the method I believe governs the operation of the world. The central bank's responsibility is to bridge leading indicators and lagging indicators, and sometimes you will find that the transmission from leading indicators to synchronous indicators is not smooth, and at other times, the transmission from synchronous indicators to lagging indicators is not smooth. But ultimately, this operational rule exists.

My biggest takeaway in 2023 is that I previously thought the only leading indicators in the U.S. were interest rates and credit/loans; now I know that the U.S. can actively increase fiscal deficits without a recession, so we need to add fiscal policy to the leading indicators, along with current QT. We discuss four levels of issues in the realm of leading indicators:

• Interest rates;
• Credit/loans;
• Fiscal policy;
• QT.

1. Interest Rates: Rate Hikes Have Ended, Timing of Rate Cuts Uncertain

Rate hikes have ended, and the timing of rate cuts is uncertain, but there will be rate cuts in 2024, with the number of cuts and timing being uncertain. Currently, it seems likely that cuts could begin in the second quarter.

I believe that rate hikes in the U.S. have ended; we have already seen the turning point. I know many will say the Fed will continue to be hawkish, and that's fine; the core judgment of the issue varies from person to person, and everyone should act according to their understanding. But for me, I believe rate hikes have ended.

From a numerical perspective:

From a logical perspective:

The core issue in an election year is not inflation but the economy. Powell has ample willingness to emulate Greenspan in 1995 rather than Volcker in 1984.

Secondly, with the current high deficit rate and debt levels in the U.S., if forced to choose between a second inflation and a major recession, the harm of a second inflation is far less than that of a major recession. The Fed currently has only two choices:

• Hawkish, reducing the probability of a second inflation while increasing the probability of a recession;
• Dovish, reducing the probability of a recession while increasing the probability of a second inflation.

Of course, Powell can also choose to be data-dependent, but the current interest rates are restrictive; if he holds steady, it is hawkish. Therefore, from his last remarks, Powell made it clear that he does not care if PCE is above 2; he can still cut rates if it is above 2. I believe this is the pivot point.

Or to put it this way, as long as there is no large-scale overspending in 2024, U.S. monetary policy needs to tighten to prevent economic decline.

2. Credit/Loans: Current Situation is Acceptable, but Outlook is Grim if Rates Don't Drop

Refinancing is a key concern for both the Fed and corporations. For companies, if there is no refinancing pressure, interest rates are irrelevant, and they can even buy bonds to earn interest.

Thus, this year, the debt repayment pressure on U.S. companies under rate hikes is even less than in 2022, but 2024, especially 2025, will be different. The Fed began raising rates in April 2022, and by the end of 2022, interest rates were already very restrictive, which means that the rollover pressure for 2-3 year corporate bonds or loans will gradually emerge in the future.

From the perspective of loans, commercial and industrial loans have not increased this year, and the growth rate of consumer loans has also begun to decline.

So the Fed is correct; the impact of rate hikes on the economy takes time to manifest. Therefore, the conclusions regarding loans and credit are very straightforward:

If the Fed maintains high interest rates in 2024, credit pressure, loan growth, and rollover pressure will all exist.

3. Fiscal Policy: Will Not Stall, but Political Uncertainty is High

In the previous long-term analysis, we introduced that regardless of the budgetary perspective or logical perspective, the U.S. fiscal deficit will maintain a high deficit rate in the future.

Logically, this is also true; a significant portion of U.S. fiscal spending is mandatory, and many are linked to inflation, so as long as inflation does not decrease, the probability of fiscal stalling is also low.

Thus, in an election year, the only part the Republicans can constrain is the non-defense portion mentioned above; the rest is mostly mandatory spending, and it is also difficult to cut the non-mandatory defense portion.

For the Republicans, what they most hope to see next year is actually a recession, not inflation. Previously, we calculated that between 1824 and 2020, in nearly 200 years, there were 25 U.S. elections that occurred during periods of high inflation or rising inflation, and in 19 of those cases, the ruling party was re-elected.

So if I were a Democrat, I would not fear inflation; I would fear a recession. For the Republicans, I believe Trump's polling is credible but not entirely reliable. First, many Americans are actually anti-Trump but do not dare to say so; who wants to be enemies with a bunch of rednecks? Second, the Democrats have many tricks up their sleeves. For the Republicans, the most likely way to make the Democrats lose next year is to create a significant inflation that forces the Fed to continue raising rates, leading to a recession.

However, I vaguely feel that although Powell is a Republican, he will not do this; he will need to be data-dependent. He will keep the yield on the 10-year Treasury bonds within a range, which I believe is between 3.0% or 3.5% to 4.2%. Next year, used car and housing prices can still exert downward pressure on inflation.

To summarize, the conclusion regarding fiscal policy is: in the long term, U.S. fiscal policy will definitely continue to overspend, with increasing deficits, but there is a certain degree of uncertainty in the election year of 2024. Next year may see short-term fiscal performance falling short of expectations, with monetary policy tightening. However, if some wars occur, for example, I believe the Republicans would very much hope for a war to break out somewhere in the world, bringing some inflation, forcing the U.S. to increase overseas fiscal spending, and then they would have more points to argue, with the Fed being forced to raise rates, ultimately leading to an unexpected recession. The Democrats would lose.

4. QT: The Story of 2019 May Repeat

The amount of excess savings in banks is always a mystery, and the Fed itself admits this, so I believe that if the Fed stops raising rates in 2024, QT will also pause at some point.

However, whether this requires a crisis to trigger a shift in the Fed's stance is uncertain. Logically, simultaneously cutting rates and reducing the balance sheet is akin to a mental split. Although Powell says these two issues should be considered separately, I still think we will look at this issue through the lens of the 2019 story. But this is not the core.

To summarize, the overall situation of leading indicators or liquidity in the U.S. next year is:

• Interest rates will not increase;
• Fiscal spending will decrease slightly year-on-year, but not stall, with political uncertainty;
• The loan and credit market is concerning;
• Other miscellaneous factors seem to have little impact;

I think it is necessary to quantify this. The current U.S. GDP is about $27 trillion, with outstanding national debt of about $33 trillion, increasing by 6% of GDP each year, and the impact on the economy is self-evident.

Corporate debt + loans total about $13 trillion, most of which is corporate debt, with loans around $2-3 trillion. Therefore, when we discuss loans in the U.S., we can only treat it as a litmus test; the core remains corporate debt.

The household sector's debt is a super large portion, with about $17 trillion in total debt, of which about $12 trillion is mortgage debt, and auto loans and credit cards are about $1-2 trillion each.

So if we discuss leading indicators in the U.S., the core is three:

• National debt;
• Corporate debt;
• Mortgage debt.

All of the above analysis serves this purpose. Aside from mortgage debt, which we will discuss in the next section, it can be seen that next year, we can only say that the growth rate of national debt will slow, corporate debt pressure will emerge, but if we say national debt will stall or corporate debt will default on a large scale, we indeed do not see it. Moreover, if the Fed shifts its stance, there will be many buyers for national debt, and the refinancing pressure on corporate debt will also be slightly reduced. Therefore, purely from these leading indicators, the liquidity of the U.S. economy next year will be under pressure, but no obvious problems are visible.

This leads to a rather troublesome gray choice:

• This situation is very similar to the two soft landings in 1987-1990 and 1995-1998, where the Fed implemented a few quick rate cuts in 1995 and 1998, stabilizing economic expectations, leading to a second boom until the tech bubble years later.
• On the other hand, all major crises begin with a soft landing. In 2006, when rate hikes paused, one could only say that there was a real estate bubble, but who would dare to predict one of the largest bubbles in human history in 2006? In July 2019, one could not see the shadow of a recession either.

A fair statement is that the pathway toward a soft landing existed but is still too early to tell.

III. Synchronous Indicators of the U.S. Economy

In the U.S. GDP of $27 trillion, about $18 trillion is from household consumption, with investment and government consumption each around $5 trillion, while exports are a drag but not substantial.

Thus, a very straightforward statement regarding the U.S. economy is: As long as American consumers continue to spend money, the U.S. economy will not be too bad.

American consumers generally draw their spending from three sources:

• Savings;
• Wages;
• Loans.

To be precise, there are only two sources, as Americans cannot have loans without wages, so the core is savings and wages.

Previously, Americans did not have much excess savings, but the pandemic's stimulus changed everything. How much excess savings Americans still have is an eternal question. According to optimistic calculations, Americans still have $2 trillion in excess savings, which is quite alarming because with $18 trillion in household consumption, if there is still $2 trillion in excess savings, then next year's GDP will face no issues at all.

A more pessimistic calculation suggests that there were only $400 billion in excess savings by the third quarter of this year, which is quite low.

I think if the Fed cannot figure this out, it is nearly impossible for us to calculate it clearly. We can only say that starting from the second quarter of next year, the U.S. may use up its excess savings, bringing additional pressure.

From the perspective of wages, as long as Americans do not lose their jobs, they will continue to earn wages and borrow money to consume, so consumption will not be poor. Historically, when the U.S. faces a recession, it is usually accompanied by rising unemployment rates.

Currently, there is clearly upward pressure on the unemployment rate, and the Fed itself believes that the unemployment rate will rise next year, but the market's expectations or the Fed's predictions are very optimistic.

Historically, such optimistic situations have not occurred. However, sometimes one cannot blindly trust history; the fiscal stimulus in the U.S. in 2023 occurred without a recession, and there is no historical precedent.

Thus, regarding household consumption in the U.S. economy, a fair statement is that it will definitely not be as good as this year, and after the second quarter, it may quickly decline due to the depletion of excess savings, but it is also uncertain. The unemployment rate is the core factor.

What about investment and government spending?

Government spending, as mentioned in the previous fiscal section, is largely linked to fiscal policy. If China's counter-cyclical measures are infrastructure, the U.S.'s counter-cyclical measures are defense spending. Just keep this in mind; if one expects a cliff-like drop in U.S. government consumption next year, the Republicans must be very strong.

Regarding investment, I believe everyone is quite clear: from the perspective of corporations, year-on-year comparisons, government legislation, and inflation, investment next year will be slightly worse than this year.

Thus, the Fed's GDP forecast for next year is much lower than this year at only 1.4%. The most optimistic Goldman Sachs gives around 2%, while the more pessimistic Morgan Stanley only gives 0.9%, all lower than this year. Therefore, I believe it is highly probable that the synchronous indicators of the U.S. economy will weaken next year. However, how much they will weaken is uncertain.

U.S. real estate is an interesting issue; houses in the U.S. are currently very expensive, and interest rates are high due to supply disruptions during the pandemic and people not knowing what to do with the free money they received.

In 2024, I believe that mortgage debt in the U.S. household sector will not stall. As long as the unemployment rate does not rise significantly, under wage growth and the help of fixed rates, Americans do not face much repayment pressure. One can only say that those who bought houses at high interest rates over the past year may face more pressure, but this is not a large-scale cash flow pressure. Moreover, frankly speaking, I believe that the wage growth of American workers will not be low in the future. Thus, a reasonable assumption is that when mortgage rates decrease a bit, more second-hand houses will enter the market, transaction volumes will increase, and price fluctuations will widen, but overall, I do not see any inducements for mortgage debt to stall.

IV. Lagging Indicators of the U.S. Economy: Inflation and Unemployment Rate Issues

Regarding inflation, I think the conclusion is very simple yet complex: if no disruptive factors occur, inflation will decrease under the pressure of housing and used cars, but in 2024, an election year, one cannot say that no disruptive factors will occur.

It is worth noting that the cyclical part of U.S. inflation is beginning to weaken, indicating that future inflation reductions may face rising unemployment rates.

As for the unemployment rate, we can only say that the job market is gradually cooling down but remains above pre-pandemic levels. Thus, there is upward pressure on the unemployment rate, but the degree and extent of the increase are uncertain.

Moreover, we just mentioned that in the long-term contradictions in the U.S., the populist demands brought about by political polarization cannot be ignored. At such times, if a ruling party causes large-scale unemployment, it will certainly be held accountable, especially in an election year where large-scale unemployment essentially equates to losing the election.

Therefore, I believe a reasonable assumption is that the unemployment rate will rise next year, but not to a crisis level. It is very likely that next year will resemble 2019, 1998, or 1995, where we approach a crisis but do not experience it next year.

Analyzing what has already happened is not difficult, but the difficulty lies in the choices.

For the Fed, it also faces long-term and short-term difficulties. The long-term difficulty is that both political polarization and de-globalization may lead to wage inflation and electoral losses. How will its 2% inflation target be achieved? This target, invented around 1995, is it really applicable to the current environment? Under populism, the unemployment rate has a ceiling; it cannot be too high. If the Phillips curve is still effective, regardless of how steep it is, inflation will have a floor. Is this floor really below 2%?

The short-term difficulty is: excessive tightening may lead to a recession, while excessive loosening may bring about a second inflation. The Fed can closely coordinate with the Treasury, but the fiscal flexibility is not that great. Therefore, if I had to make a guess for next year, I believe long-term interest rates will also fluctuate within a range. The upper limit of this range is where the Fed believes it may cause tightening and recession, which I think is 4.2%. The lower limit is where the Fed believes it may cause a second inflation, possibly 3.5% or even 3.0%, depending on how the U.S. economy performs next year.

For U.S. corporate sectors, if the U.S. cuts rates next year, I believe the choices between inflation-benefiting companies and those that do not benefit from inflation will be starkly different. In other words, companies that can raise prices will have a very different experience from those without cash flow. Or to put it this way:

• If the U.S. ultimately achieves a soft landing or experiences a second inflation, then U.S. real enterprises will outperform tech companies or those without cash flow;
• If the U.S. ultimately faces a hard landing, then companies without cash flow will fare better.

My view on super companies like Meta, Apple, and Amazon is that they are no longer purely growth-oriented companies; their cash flows are closely tied to the U.S. economy. Their biggest problem is regulatory risk. Currently, there is still no soil in the U.S. calling for government intervention in the economy, but fiscal spending is increasing, and the government's control over the economy is growing. During the last political polarization, the power of the U.S. presidency actually increased because Congress never reached a consensus. After the crisis of 1893, the public called for more change, gradually tilting the balance of power toward the presidency.

Currently, these large companies in the U.S. are too big to fail, but the other side of this issue is that as long as the U.S. economy encounters problems, they will certainly face issues too. I believe that at that time, there will be calls for increased regulation of them, and the government, which has enjoyed the fun of expanding fiscal policy, will also welcome this. What is now lacking is a president with popular support. Trump would be a very interesting candidate.

V. Conclusion

Finally, let’s summarize our views on the U.S. economy for next year. In this era, predicting a year ahead is truly challenging, but having a base case makes it easier to adjust later:

• Monetary easing, fiscal decline, corporate debt pressure, but not to the point of stalling;
• Economic pressure may become more apparent after the second quarter, but not to the point of stalling;
• The unemployment rate may rise, but in an election year, many measures will be taken to prevent a recession;
• The Fed will attempt to learn from the policies of 1995, 1998, and 2019, implementing a few 25bp rate cuts, with the previous increases being somewhat excessive, possibly requiring 4-5 or even 6 cuts to stabilize economic expectations and achieve a soft landing;
• In summary, the U.S. economy in 2024 has two possibilities: one is a dovish Fed leading to a soft landing and possibly a second inflation; the other is a hawkish Fed leading to a hard landing. The Fed has chosen the former, opting for the first path amid the risks of a second inflation and hard landing. The pathway to this is a weakening economy - decisive rate cuts - economic support leading to a second strengthening. If oil prices rise while the economy weakens, then the Fed may face the same dilemma as in 2007-2008, where the economy weakened with oil prices above $120, leaving them in a bind.

Therefore, in 2024, in chronological order, I believe the following three scenarios may unfold:

Initially, interest rates will fluctuate within a range, with the upper narrative being "FCI tightening into recession," then the Fed will reassure the market, and the lower narrative will be "soft landing - reflation," followed by the Fed intimidating the market.

Later, as the economy weakens, the Fed will begin to cut rates, but the choice at that time will be: will the future be deflation or reflation?

This depends on oil prices, as well as the responses from fiscal policy and the Fed.

After the rate cuts, elections may become a new focus, as Trump and Biden still have differences in their views on the economy. In fact, Trump and figures like Milei share some commonalities, but we have already said enough today.

That's all for today.