Source: Zhao Wei Macro Exploration
Author: Zhao Wei Yang Fei (Zhao Wei is the Chief Economist of Kaiyuan Securities and a director of the China Chief Economist Forum)
Report highlights
The reduction of fiscal issuance, the decline in PMI and the "falling and falling" interest rate of 10Y US bonds have frequently appeared in the voice of bearish US economy. What is the real growth momentum of the US economy, and what is the direction of the future? Thematic analysis for reference.
A question: Will the reduction of fiscal money lead to a sharp decline in the US economy? No
The massive fiscal stimulus imposed after the pandemic has led to a significant decline in the impact on the US private sector balance sheet and has driven sustained rapid economic recovery. Taking history as a mirror, due to the greater impact on the balance sheet of the private sector, fiscal stimulus will often affect the recovery process of the economy out of recession. Benefiting from the large-scale fiscal stimulus after the epidemic, the debt repayment pressure of US residents has dropped to a record low, supporting the economy to quickly stop falling and rebound.
Rapidly growing compensation incomes, along with higher savings levels, could help keep the U.S. private sector balance sheet healthy in the future. Although the fiscal payment is nearing the end, the rapid economic repair has led to the rapid growth of the salary income of US residents, supporting the level of total income to continue to be much higher than the historical trend line. The balance sheet of residents' health is also reflected in the "labor shortage" of AMERICAN companies, because there is no shortage of money, etc., and some residents have been reluctant to work.
Second question: The end of the replenishment will drag the economy into recession? Actual inventories are low and replenishment is far from over
Contrary to the information released by the sharp year-on-year increase in nominal inventories, in the past two quarters, the actual inventory in the United States has been widened and continued to dematerialize due to the widening gap between supply and demand. Soaring prices and a low base in 2020 have raised year-over-year readings of U.S. nominal inventories to high. However, this does not represent a true inventory change in the United States. Due to the sharp expansion of demand and insufficient domestic production capacity, the actual inventory level in the United States continued to decline in the first and second quarters, which was destocked and non-replenished.
As new orders continue to increase sharply and the repair of superimposed domestic production capacity accelerates, US inventories may begin to be replenished, forming favorable support for the economy. With the large-scale promotion of vaccines and the low number of new deaths, the US economy has been restarted in an orderly manner, and the repair of industrial production has been accelerating. Superimposed new orders continue to increase, the United States will next or will enter the inventory trend replenishment channel. Referring to historical experience, the shift from destocking to replenishment will be conducive to the sustained and steady growth of the US economy.
Three questions: The decline in PMI and US Treasury interest rates reflects that the momentum of economic growth has accelerated attenuation? Not really
The decline in PMI and US Treasury interest rates does not accurately reflect the overall picture of the US economy at present. Because the epidemic has interfered with the repair process of different sectors of the economy, the trend of the main sub-index of the US PMI continues to diverge or even diverge, and the PMI index synthesized by the sub-index is therefore difficult to accurately reflect the trend of the US economy. Similarly, the sharp divergence between the 10Y US Treasury interest rate and us inflation, contrary to historical experience, shows that the former's decline is difficult to explain by economic factors. In fact, the Treasury Department's pressure on deposits and the reduction of bond issuance are the main reasons for the decline in the interest rate of 10Y US bonds.
The endogenous growth momentum of the US economy is strong; after the future fiscal disruption subsides, the 10Y US Treasury interest rate may be driven by fundamental logic and return to the upward channel. The continuous acceleration of new orders for core capital goods on the enterprise side, the opening of the capital expenditure cycle, and the rapid growth of residential compensation income and the continuous acceleration of service consumption repair all show that the endogenous growth momentum of the US economy is strong. For the 10Y US Treasury interest rate, after Congress agrees on the debt ceiling and the interference of fiscal factors subsides, it may follow the continuous release of inflationary pressures and resume the upward trend.
Risk Warning: The U.S. government is once again facing a "fiscal cliff."
The body of the report
1. Weekly Topic: Bearish on the U.S. Economy? It's too early
Event: Since June, the decline in some aggregate indicators and the "falling and falling" of the 10Y US Treasury interest rate have made the voice of the US economy bearish frequent.
Source: Bloomberg, Wind
1.1, a question: the reduction of fiscal money, will lead to a sharp decline in the US economy?
Historically, the greater the fiscal stimulus implemented in times of crisis, the stronger the U.S. economy tends to perform beyond recession. Looking back at history, after the US economy fell into recession, the Federal Reserve generally quickly relaxed the currency to support the economy. In contrast, in times of crisis, the implementation of U.S. fiscal policy generally varies widely. Summing up the experience, the greater the fiscal stimulus, the stronger the growth momentum of the US economy out of recession tends to be. For example, in 1974 and 1981, after the Implementation of fiscal and monetary stimulus in the United States, the pace of the economy out of recession was significantly faster than that in 1980 and 1990. In 2001 and 2008, although there were very serious economic crises, because of the greater fiscal stimulus, the recovery process of the US economy after 2001 was faster than that after 2008.
Large-scale fiscal stimulus is conducive to accelerated economic repair, which is closely related to the former's ability to effectively mitigate the negative shocks suffered by the private sector and "help" balance sheets remain healthy. Monetary policy can "release water" in times of crisis, and can also "collect water" during recovery periods, and unlike monetary policy, fiscal policy in times of crisis tax cuts, "money", etc., will directly help residents and enterprises, and this help is generally "non-recyclable". This feature of fiscal policy allows it to significantly affect the balance sheet status of the private sector and, ultimately, the recovery process of the economy emerging from recession. Looking back at history, in the past, when the US economy came out of the recession and recovered at a faster pace, the debt repayment pressure of the residential sector was relatively light, and the latter was generally closely related to large-scale fiscal tax cuts and tax rebates.
The onslaught of fiscal stimulus, the most on record, has seen a sharp decline in the impact on the U.S. private sector balance sheet. Compared with the past, after the United States suffered from the new crown epidemic in 2020 and the economy fell into a severe recession, the US government implemented the strongest fiscal stimulus policy in history, including multiple rounds of large-scale "money" to the resident sector and a large number of low-interest loan assistance to the corporate sector. Massive fiscal stimulus has caused a sharp decline in the impact on the balance sheet of the US private sector. Taking the residential sector as an example, the income level of residents has "not fallen but risen" after the outbreak of the economic crisis, which is the first time in history, and the debt repayment pressure (debt-related expenditure as a proportion of disposable income) has fallen sharply, refreshing the new low since 1980.
Supported by a healthy balance sheet in the private sector, the U.S. economy has rapidly emerged from recession and continues to accelerate its recovery. Consistent with historical experience, a healthy private-sector balance sheet has greatly "helped" the U.S. economy. For example, U.S. GDP growth fell to a record low in Q2 2020, but then rebounded rapidly and soared to a record high in Q1 2021 from negative to positive and absolute levels in Q2. The speed of repair of employment is also "fast". As of July, the recovery rate of non-farm payrolls in the United States (the degree to which the number of jobs lost during the previous crisis) had exceeded 75%, far faster than since the two crises in 2001 and 2008.
Rapidly growing compensation incomes on the residential side, along with ultra-high levels of savings, will help the U.S. private sector balance sheet remain healthy in the future. The fiscal stimulus, which was the most intense in history, pushed the US economy out of recession quickly. With the economic recovery and the beginning of the fiscal stimulus decline, some market views have therefore proposed that "the ebb and flow of fiscal stimulus will lead to a recession in the UNITED States." But the reality is that, despite the ebb and flow, the strong growth momentum of the economy has driven the sustained and rapid growth of the salary income of U.S. residents and made the total income continue to exceed the historical trend line after the fiscal disbursement has decreased. The healthy balance sheet of U.S. residents is also reflected in the "labor shortage" of enterprises. Because of "no shortage of money", many American laborers are reluctant to work, and companies have to continue to raise wages.
1.2, the second question: the end of the replenishment and the beginning of the destocking will drag the US economy into recession?
Some market views also suggest that the U.S. is about to begin destocking and will lead to a recession as a result. According to the latest US inventory data, as of May, the year-on-year growth rate (nominal value) of total private sector inventories has reached 4.5%, exceeding pre-epidemic levels and approaching the high point of 2019. Among them, the year-on-year growth rate of manufacturing inventories reached 4.8%, close to the level of the beginning of 2020, the year-on-year growth rate of retailer inventories reached 3.7%, refreshing a new high since August 2019, and the year-on-year growth rate of wholesalers' inventories rose to 10.2%, the highest level since 2012. The year-on-year growth rate of inventories rose to a high level, which was used by some market views to argue that the US economy was about to enter the destocking phase and thus move towards a recession.
But U.S. private-sector "real" inventories have been dematerialized for two consecutive quarters, and absolute levels have fallen to low levels. The year-over-year spike in PPI, supported by a low base for the same period in 2020, raised year-over-year readings of nominal inventories in the U.S. private sector to high. However, this does not reflect the true inventory levels in the United States. Judging from the latest 2nd quarter GDP data released, whether it is manufacturing, wholesalers and retailers, the actual value of inventory has declined for 2 consecutive quarters since the beginning of the year, and the actual year-on-year growth rate of inventory is at a historical low. Over the past two quarters, the continuous destocking of inventories has caused a significant drag on the reading of the US GDP month-on-month depreciation rate.
Continued sharp expansion of demand, as well as relatively insufficient domestic production capacity, caused by supply shortages, are the main reasons for the "contrarian" destocking of US inventories. The decline in actual U.S. inventories is not due to bad demand. Taking retailers and wholesalers as an example, as domestic demand continues to expand significantly, retail and wholesale sales have both soared, and the absolute level is far beyond before the epidemic. Demand has improved sharply, and inventories have "gone against the trend", which is more dragged down by insufficient supply. As of June, the production level of the US manufacturing industry has just returned to near the pre-epidemic level, and the production of the automobile and parts industries has fallen sharply due to "lack of cores". High demand and insufficient supply have led to a sharp decline in the inventory-to-sales ratio of retailers and wholesalers, which has led to a record low in the automotive and parts industries.
With the large-scale promotion of vaccines, the acceleration of domestic production capacity repair, and the continuous increase in new orders, the US private sector may begin to "replenish inventory". On the one hand, although the new mutant virus has spread in a large area in the United States, thanks to the large-scale promotion of the early vaccine, the United States has formed a relatively effective "immune network", and the number of new severe patients and deaths continues to be low. As we continue to unseal and restart the economy, the repair of U.S. domestic production capacity has begun to accelerate. In addition to being supported by the recovery in production capacity, the continued surge in new orders will also drive faster inventory replenishment in the U.S. private sector. According to the latest data, driven by the sharp increase in new orders, the inventory of base metals, machinery and equipment and other industries in the United States has risen sharply year-on-year.
The replenishment of private sector inventories will form a favorable support for the US economy. Historical experience, changes in inventories have always been the "elastic items" of economic performance. For example, in the stage of the economy, inventory replenishment often leads to further acceleration of economic growth; on the contrary, in the stage of economic weakness, inventory destocking often accelerates the economic downturn and eventually falls into recession. For the U.S. economy, the shift from destocking to replenishment in the private sector will undoubtedly provide favorable support for future economic growth.
1.3, three questions: PMI and 10Y US Treasury interest rates are declining, reflecting that the US economic growth momentum has accelerated attenuation?
Because the epidemic has interfered with the repair process in different sectors of the economy, a single aggregate indicator, led by PMI, cannot accurately reflect the overall picture of the US economy. Some market views use the peak and decline of aggregate indicators such as PMI to argue that the momentum of US economic growth has accelerated attenuation. However, the reality is that the pandemic has disrupted the recovery process in different sectors of the U.S. economy, and aggregate indicators such as PMI have dropped significantly to the economy. Taking the manufacturing PMI as an example, since the second half of 2020, under the interference of the epidemic, the trend between new orders, production, employment and supplier delivery index in the PMI has been frequently differentiated and even diverged, which is completely different from the past. The PMI index, which is synthesized from sub-indexes, obviously does not accurately reflect the growth momentum of the US economy.
The downward trend of the 10Y US Treasury interest rate is greatly disturbed by the pressure drop of fiscal deposits, which is obviously contrary to the trend of the US economy and inflation. Because it can reflect the economic trend in the past, the "falling and falling" of the 10Y US Treasury interest rate since June has been identified by some market views as a signal that the US economy has entered a downward channel. However, the continuous divergence of the 10Y US Treasury interest rate and the US CPI year-on-year performance contrary to historical experience show that the former's decline is difficult to explain by economic factors. In fact, the decline in the 10Y US Treasury interest rate is closely related to the Treasury's behavior of reducing deposits. On the one hand, the Treasury's massive pressure drop on deposits, together with the Fed QE, has triggered a flood of liquidity in financial markets. On the other hand, in the process of deposit pressure, the Ministry of Finance continued to reduce the issuance of treasury bonds, resulting in further distortion of the supply and demand pattern of US bonds.
The continuous acceleration of new orders for core capital goods on the corporate side, as well as the rapid growth of residential salary income and the acceleration of service consumption repair, all show that the endogenous growth momentum of the US economy is strong. Dissecting the U.S. economy, the continuous rise in the growth rate of new orders for core capital goods, and the sharply increased willingness of entrepreneurs behind them, reflect that the capital expenditure cycle in the United States has just begun. At the same time, the continuous rapid growth of salary income, the core of residents' income, and the unsealing of various activities of the superimposed vaccine promotion "help" offline will promote the repair of service consumption in the United States, which accounts for 60% and 42% of the total private consumption and GDP, respectively. The start-up of the capital expenditure cycle and the acceleration of the repair of service consumption both show that the U.S. economy has strong endogenous growth momentum.
Strong us economic growth momentum and high inflationary pressures mean that after the interference of fiscal factors subsides, the 10Y US Treasury interest rate may return to the upward channel. Looking back at the history of the United States, in the past, there was no interference from non-economic factors such as fiscal deposit pressure, accompanied by a good economy and a year-on-year increase in CPI, and the 10Y US Treasury interest rate often trended upwards. Looking forward to the trend of the current round of 10Y US Treasury interest rates, after the US Congress agreed on a new debt ceiling and the pressure on fiscal deposits followed, the dominant logic of US Treasury interest rates may return to economic fundamentals. In this context, the strong endogenous growth momentum of the US economy, combined with good demand and supply constraints, continues to push up inflationary pressures (1), or will drive the 10Y US Treasury interest rate back to the upward channel.
(1) For an analysis of inflationary pressures in the United States, please refer to our published "Global Inflation Era" series of reports.
2. Focus: U.S. July CPI
3. Risk Warning
The U.S. government is once again facing a "fiscal cliff."