"Latest US PMI data challenges the case for aggressive rate cuts moving forward"

Two-thirds of US GDP relies on consumer spending. Before COVID, savings totalled approximately $2.51trn, but by March 2024, this had essentially dropped to zero. Since then, credit card debt in has reached record levels, with US consumers now owing a record $1.14trn in credit card debt, according to a report by CBS. Although consumers continue to spend, they are increasingly relying on expensive forms of credit, often spending money they cannot afford. This is evidenced by credit card delinquencies rising, reaching 7.18% in August, up from 5% in the previous quarter, according to the Federal Reserve. A closer look at the economy reveals that job creation has slowed significantly, and more middle-class Americans are now working two or three jobs just to make ends meet. Despite the positive headline figures, the American economy is slowing rapidly, and it cannot continue expanding indefinitely, as consumers cannot keep borrowing unlimited amounts of money.

In a scenario reminiscent of a financial Jekyll and Hyde, the latest US Flash PMIs unveiled an economy with a split personality, as services exhibit robust health while manufacturing appears to be under the weather. The services sector continues to be the shining star of the US economy, demonstrating resilience in the face of ongoing economic challenges. This strength is particularly noteworthy given the unexpected 50bps rate cut from the Fed, calling into question whether the size of this cut was really necessary. However, the underperformance in manufacturing highlights a sector entangled in a web of persistent challenges, with ongoing global supply chain disruptions and persistent cost inflation pressures. As investors navigate an economic landscape of stark contrasts, it is abundantly clear that the US economy defies simplistic characterisation. However, with the economy facing crosscurrents, we may be entering a period of increasingly choppy waters in the months ahead.