As we look ahead to end of 2024 and beyond, the U.S. economy faces a pivotal transition, moving from a period of supply-led growth to demand-led growth—a shift with significant implications for financial markets, labour dynamics, and economic stability. To better understand this shift, consider the analogy of a farmer called John, whose story illustrates the delicate balance between the supply and demand of labour.

In his first year, Farmer John harvests 10,000 oranges, but with demand soaring at 15,000 oranges, he quickly sells out, leaving many customers empty-handed. Encouraged by this success, he decides to expand in the second year. By hiring more workers and slightly increasing prices, John boosts production to 11,000 oranges. However, demand dips to 12,000 oranges, still allowing him to sell every orange he grows. Emboldened, John decides to ramp up production even further in the third year, reaching 12,000 oranges. But this time, demand falls to 11,000 oranges, leaving him with surplus fruit for the first time. Unable to sell his entire crop, John is forced to cut costs, leading to the difficult decision to lay off some of his employees. The once-thriving expansion has now led to unexpected challenges, highlighting the delicate balance between supply, demand, and growth.

This narrative mirrors the current situation in the U.S. labour market. For the past three years, labour supply has been the binding constraint on employment growth, as demonstrated by rising employment despite stagnant labour demand, as shown in figure 1.  Data shows a decline in job openings and slowing wage growth, highlighting a lack of demand-side strength. As labour supply continues to increase while demand remains tepid, a potential oversupply of labour could lead to rising unemployment by late 2024 or early 2025, a scenario which could trigger a self-reinforcing cycle of economic downturn.

figure 1

While there are some signs of stabilization—such as a slight increase in job openings on platforms like Indeed—other indicators suggest this stabilization might be temporary. Factors such as a weakening housing market, declining consumer spending, and sluggish business investment signal ongoing economic challenges.

The housing market, a key driver of economic activity, is showing renewed signs of stress. Home builder confidence is at its lowest this year, home sales remain weak, and housing starts and permits have declined. Although construction employment has not yet fallen—likely because builders are hoarding labour—further weakening in housing activity could lead to lay-offs in the sector. Moreover, commercial real estate is under significant pressure, with office vacancy rates at record highs and delinquency rates rising across various segments, including office, apartment, retail, and hotel properties.

Consumer spending, another crucial pillar of economic growth, is likely to soften as excess pandemic savings dwindle. Factors such as tightening bank lending standards, record-high credit card interest rates, and rising delinquencies are constraining consumer credit. Unlike the period before the Global Financial Crisis (GFC), households are not leveraging home equity to support spending. With the personal savings rate at a dismal 3.4%, nearly half of its 2019 level, consumer resilience is waning.

The possibility of easier fiscal or monetary policy providing a cushion to the economy appears limited. The federal budget deficit is set to reach 7% of GDP in 2024, leaving little room for additional countercyclical fiscal measures. Rising interest payments are already constraining other types of government expenditures. The Congressional Budget Office (CBO) forecasts that the primary budget deficit, excluding interest expenses, will grow more slowly in 2024 and potentially shrink by 2025, depending on the political landscape following the November elections.

Monetary policy also faces limitations. Although the market expects the Federal Reserve to cut rates by over two percentage points in the next year, past cycles suggest that such rate cuts may not prevent a recession. Historical patterns from 2001 and 2007 show that recessions followed shortly after the Fed began cutting rates, as seen in figure 2. The anticipated rate cuts might come too late to avoid a downturn, and their impact would likely be delayed, particularly in the housing market where mortgage rates could remain high as low-rate mortgage bonds mature and are replaced with higher-rate ones.

figure 2

While the U.S. is not currently in a recession, economic indicators are pointing to a rapidly cooling economy. Despite this, payroll growth remains healthy and the Atlanta Fed’s GDPNow model still predicts a 2% growth rate for the third quarter. However, the signs of economic slowing are becoming more apparent, and by late 2024 or early 2025, the U.S. economy could face a more pronounced downturn.

A U.S. recession could have a significant impact on global currency markets, particularly the U.S. Dollar, as measured by the DXY Index, and the South African Rand (ZAR). During recessions, the dollar often experiences a bull market and strengthens as investors seek safe-haven assets, potentially driving up the DXY. A stronger DXY typically puts downward pressure on the ZAR while increasing USD/ZAR volatility.

At wauko we work with our clients to formulate and manage a comprehensive foreign exchange risk management policy. We will gladly assist you with your process to help you do more and grow more. Contact Dale Petersen on 021 819 7802 or at dpetersen@wauko.com to connect with us.