As we approach the final quarter of 2024, the U.S. economy finds itself in a delicate position, where economic imbalances may give rise to instability within a financially stable US economy. The period between 1985 and 2007, known as the “Great Moderation,” is a classic example of how periods of apparent stability can sow the seeds of future crises. Inflation and interest rates remained low during this time, spurring a credit boom that eventually culminated in the Global Financial Crisis (GFC) of 2008. In response to the GFC, US households reduced debt, and banks fortified their balance sheets by raising capital and tightening lending practices. The US economy is in a better position than it was in the lead-up to the GFC, however, new and recurring economic imbalances have emerged, potentially setting the stage for a mild recession toward the end of 2024 or early 2025.

Real Estate Imbalances

Commercial real estate (CRE) is facing significant challenges, exacerbated by the pandemic. Office vacancy rates are at record highs (figure 1), with prime office space being sold at significantly reduced prices. The IMF reported an 8.9% year-over-year decline in commercial real estate prices in Q1 2024—the worst performance since the GFC. Delinquency rates have also surged across the CRE sector, signalling further trouble ahead.

Regional banks, which are highly exposed to CRE loans, may very likely, face another round of failures, furthering the potential for financial instability. The residential real estate sector, particularly multi-family housing, is also struggling with excess supply. Rising vacancy rates and stagnant rents over the past two years suggest that this sector could experience more stress, further destabilizing the housing market.

figure 1

Consumer and Debt Pressures

While nominal personal spending has increased by 5.3% over the past year, disposable income has only grown by 3.6%. Meanwhile, the personal savings rate has dropped to a mere 2.9%, less than half of its 2019 level. The depletion of pandemic savings means that households are more vulnerable to income shocks and rising interest rates. This dynamic will likely reduce consumption growth by up to 1.5 percentage points, which could be further exacerbated if wage growth continues to slow, and employment levels decline.

Rising delinquency rates in credit card and auto loans have already reached levels comparable to 2010. As banks tighten lending standards and raise interest rates on loans, credit card debt growth is slowing. Furthermore, banks have shown little interest in expanding home equity lines of credit (HELOCs), reflecting a cautious stance on household debt.

Manufacturing Struggles

The manufacturing sector has seen a decline in new orders, with the ISM new orders index falling to its lowest level since May 2023. Similarly, global manufacturing hubs such as China and Germany are experiencing significant imbalances. In China, domestic demand is faltering due to a weak housing market, leading to excess production and rising losses among firms. Germany’s manufacturing sector faces headwinds from higher energy costs and declining competitiveness, as its unit labour costs have risen more rapidly than those of other European economies.

In the US, pandemic-driven excess spending on consumer durable goods has led to an oversupply. While spending on these goods has tapered off, it remains above pre-pandemic levels, contributing to imbalances in the manufacturing sector.

The Role of Fiscal Policy

Government spending has played a key role in supporting the US economy, particularly at the state and local levels. However, looking ahead, state and local government spending is projected to decline by 6.2% in fiscal 2025, following two years of robust growth according to BCA Research. At the federal level, the direction of taxes and government spending hinges on which political party comes out on top in the November elections. However, the already-high budget deficit of 7% of GDP leaves little room for additional countercyclical fiscal measures.

Conclusion

As economic imbalances intensify across key sectors, businesses face heightened risks from declining real estate values, slowing consumer spending, and faltering manufacturing activity. Treasury, forex, and risk management solutions provide essential tools for mitigating these risks, ensuring financial resilience and stability in a rapidly evolving economic landscape.

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.