Albert Edwards doesn’t think that the consumer can keep the US economy afloat for very long.
The über-bearish strategist for Societe Generale said in a note Thursday that the US economy is perilously near “stall speed” and a recession is near.
Edwards argued that declining business investment and profits are presaging a recession, a point that he has made a number of times, and that the only thing supporting the economy is the consumer, which comprises about 70% of US GDP. This support that consumers are providing for the economy, according to Edwards, is “about to be kicked away.”
“The only thing keeping the US out of recession is the US consumer,” wrote Edwards. “It is difficult to say consumption is driving the economy forward rather it is like a wood worm-ridden crutch creaking under the strain of holding up a dead weight economy. This recovery the fourth longest in history is surely nearing its end.”
Edwards compared the current situation to 2007, when consumption was the only thing keeping overall GDP positive as well. Eventually, the lack of business investment and slowing labour market eventually caught up to consumers and overall GDP collapsed.
Increasing inflation, as measured by the Consumer Price Index, will also start to sap some of the consumers’ strength. Essentially, Edwards argued, as prices increase consumers will be more cautious about their purchases and spending will decline.
Edwards did concede that the tight labour market may drive up wages
“But with the Fed confronted with a traditional end-of-cycle, tight labour market with accelerating headline CPI and wages, the pressure to hike rates aggressively will be fierce. Perhaps the next recession will be of the normal, made in Washington variety after all,” he concluded.
Now to be fair, the US consumer does make up a significant majority of US GDP growth in general and consumption hasn’t exactly showed signs of slowing down. So rather than a crutch, consumption is mote of the main driver. Additionally,the corporate profit decline actually improved in the second quarter.
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