Macro

Warning signs for the US economy

Christopher Dembik

Head of Macro Analysis

The US expansion, which started in 2009 when the then-Federal Reserve chair Ben Bernanke noticed “green-shoots”, is one of the oldest on record. Assuming that we make it to July 2018 (which is highly certain), the current expansion will be nine years old. That said, warning signs are popping up here and there, indicating that the economy is losing momentum. 

Two of three key drivers of the US economy are negative: credit impulse (which represents the flow of new credit issued by the private sector in % of GDP) and profit impulse (calculated as net value added minus compensation of employees).

Cycle impulses

Chart explanation: Credit impulse is calculated based on the flow of loans from the domestic nonfinancial sector on a quarterly basis, then a second derivative is calculated and finally expressed as a percentage of GDP. Capital impulse represents net fixed investments as a percentage of GDP. Profit impulse is the net value added minus compensation of employees expressed as a percentage of GDP.

The US credit impulse, which leads the real economy by nine to 12 months, has been in contraction since Q3 2017. It was running at 0.4% of GDP in Q2 and by Q3 it had fallen to minus 0.7% of GDP. The magnitude of this negative impulse is not comparable with the decline observed after Lehman Brothers but the signs are still worrying. The recent negative trend could be confirmed on March 8 with the release of data about the flow of funds from domestic nonfinancial sectors for Q4 2017 by the Fed. The slowdown is also visible in demand for C&I loans which has declined over the past quarters to 1.6% year-on-year in Q4 2017 versus 5.4% y/y in Q4 2016 on the back of tightening standards on loans and monetary policy normalisation.

Credit impulse versus final domestic demand
 In a highly leveraged economy like the US, credit is a key determinant of growth. In the coming quarters, lower credit generation will translate into lower demand and lower private investment, thought it might be partially mitigated by Trump’s tax reform. There is a high correlation (0.70) between US credit impulse and private fixed investment and a significant (0.60) correlation between credit impulse and final domestic demand.

Credit impulse versus final domestic demand
 
Lower credit generation is happening at a pivotal moment for the US economy since the risk of a downturn in the industrial cycle has increased over the past six months. US manufacturing, known as an efficient coincident indicator of the industrial earnings cycle, has certainly already reached a peak in the cycle. It hit a 13-year high in September 2017 at 60.2 and since then it has slightly decreased to 59.1 in January of this year.

US industrial cycle
 
The combination of a contraction in the US credit impulse, lower but not yet negative C&I loans growth, and the risk of yield curve inversion are clear signs that the USs is close to the end of the cycle. So far, these indicators have not yet reached levels associated with a recessionary risk but they validate the scenario of an upcoming economic slowdown that could be worsened when the lagged effect of decline in China's credit impulse since last year also impacts global growth.  

Credit impulse versus yield curve

For more on the US credit impulse, download Saxo Bank's monthly view of this metric here.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.