Five charts that matter for investors

A productivity boom?

US productivity has disappointed in recent years. Outside of a surge in 2020-2021, linked to a sharp jump in unemployment and trade activity around the COVID-19 pandemic, the efficiency of the economy has trended lower for most of the last 25 years (see chart). However, there is glimmer of hope, after three consecutive quarters of significant improvement.

It’s hard to pinpoint exactly what’s driving this productivity renaissance. Some enthusiasts will point to the initial impacts of artificial intelligence, some will credit “re-shoring” and others the large government-spending plans. In any case, this is a trend worth monitoring, as it could influence the country’s growth potential and, with it, where interest rates are headed. 

US labour productivity growth is accelerating

Year-on-year changes in US labour productivity since 1999 flag a dramatic rebound in the data since 2022

Is the US population expanding faster than reported?

According to official data, the US population increased by around 1.6 million people in 2023, a rather small number by historical standards (see chart). However, a few sources claim that the published number vastly underestimates the contribution from illegal immigration. Some reports suggest that US population growth was closer to 3.8 million in 2023, which would make it the largest increase in the last century.

Reading the news, it’s true that illegal crossings into the US frequently make the headlines, suggesting that the country’s borders are almost “open” for anyone to join “the land of the free”. By nature, measuring illegal immigration is a challenge. As such, no one can verify if 3.8 million is the right number. 

That said, it seems safe to assume that immigration is boosting US population growth. While this may be seen as good news at a time when the country is ageing and shrinking, demographically, it also may challenge the productivity boom that we referred to previously.

Is the US population growing faster than previously thought?

The net annual change in the US population since the early 1900s shows a downtrend since the 1990s.

Is disinflation over?

Inflation has trended down (marking a period of disinflation)in most developed economies since the middle of 2022. The US headline consumer price index (CPI) had collapsed to 3.1% in January from 9.1% in June 2022. The deceleration in prices has been more dramatic in the UK, plunging to 4% from 11.1% between October 2022 and this January.

Yet, the recent moderation appears to have stalled. In fact, within the components of the US core CPI basket, which excludes volatile items like food and energy, areas that are usually the least susceptible to change, so-called “sticky” prices, rebounded in January (see chart). 

While the road to the 2% inflation target was always likely to be bumpy, the latest inflation news could be a potential source of concern for central bankers. But one data point doesn’t make a trend nor mean that the period of disinflation is over. Instead, it may just have paused, and we continue to expect a further decline in inflation this year.

The moderation in US “sticky” core prices has stalled

Changes in the US core “sticky” consumer price index over the last decade show that the post-pandemic return of inflation to the 2% target rate will not be smooth  

Smaller banks feeling the pressure

Credit quality and risk is a hot topic at the moment. With consumers running out of excess savings built up during the COVID-19 pandemic and credit balances reaching new highs, there are growing concerns that a wave of defaults could be around the corner, especially in the US.

So far, large banks have been relatively immune from this phenomenon, with provisions being in line or lower than expected for the final quarter of last year. Data from the US Federal Reserve backs this up: while credit-card loans delinquency rates, reflecting loan payments that are overdue, have picked up among the top 100 US banks, they are far from the levels seen at the height of the global financial crisis (GFC) in 2008-2009. 

However, it’s a different picture for smaller banks. In fact, they are suffering an unprecedented level of delinquencies, much higher than seen during the GFC (see chart).

Clearly, worsening credit risk for banks could lead to stress in the financial system. But, it’s also one of the clearer signs yet that US banking is now a two-tiered industry and that some consolidation at the lower end of the scale seems inevitable.

US smaller banks appear to be most exposed to bad loans

The delinquency rate on credit card loans for the 100 largest banks and the rate for smaller peers has risen since 2021. But while delinquency rates are manageable for the largest banks, their smaller brethren face rates that are the highest seen in at least 30 years 

US households’ balance sheets are in a good shape

Although smaller US banks are feeling the pressure of increasing credit card delinquency rates, the reality is that the country’s households have shored up their balance sheets in recent years. This is true for both the top 1% earners as well as the bottom 20% (see chart).

In fact, those at the bottom of the income distribution have cut their leverage – as measured by their total liabilities over their assets – by 10 percentage points in the last decade. The main contributor to this reduction in leverage appears to be real-estate valuations on the asset side of the balance sheet. This is not surprising, given that the median price of US home sales has nearly doubled in this period. At the same time, consumer credit fell sharply, which helped to lower liabilities.

The good news is that with less leverage, systemic risks may have fallen. However, an increasing proportion of household assets are held in the form of real estate, and therefore rather illiquid. This may hinder people’s ability to meet unexpected bills and could explain why they are increasingly reliant on consumer credit to finance their day-to-day expenses.

US households remain less levered 

The change in liabilities as a percentage of assets since 1990, split between the top one percent of the US population and bottom 20% by income, highlights the plunge in the ratio seen by the latter group since 2016, while being less pronounced for the former 

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