Investors Beware: American Economy Showing Weakness
There are cracks appearing in the American economy. Investors beware.
If you want to see where the American economy is headed next, you have to pay attention to how certain sectors of the economy are doing, get a grasp on how consumption could look, and understand what’s happening around lending.
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Construction Spending in American Economy Decelerating
The first thing worth watching in terms of the U.S. economy is construction spending.
Take a look at the chart below. It plots the year-over-year percentage change in construction spending in the U.S.
(Source: “Total Construction Spending: Total Construction in the United States,” Federal Reserve Bank of St. Louis, last accessed January 29, 2025.)
It is said that a picture is worth a thousand words, and that seems to be the case with the chart above as well.
Over the past few years, there has been a serious deceleration in construction spending in the American economy. Consider this: in early 2022, construction spending was growing at a pace of around 20% per year. As of November 2024, it was down to just three percent.
Why bother paying attention to construction spending?
Well, the construction sector is a massive creator of jobs and value for the American economy. If this sector isn’t growing, it could mean many jobs are on the line, which means the economy is as well, ultimately.
Manufacturers’ New Orders Decline
Next, take a look at the new orders for durable goods at manufacturers. The chart below plots the year-over-year change in monthly figures, excluding defense orders.
(Source: “Manufacturers’ New Orders: Durable Goods Excluding Defense,” Federal Reserve Bank of St. Louis, last accessed January 29, 2025.)
Notice something interesting?
Since mid-2024, new orders have been extremely volatile, and declining overall.
To give you some perspective, between August and December 2024, new orders at manufacturers for durable goods declined every month on a year-over-year basis, except in the month of October.
Banks Becoming Pessimistic on Business Loans
Lastly, take a look at the charge-off rate on business loans at banks. This figure should scare you a bit.
(Source: “Charge-Off Rate on Business Loans, All Commercial Banks,” Federal Reserve Bank of St. Louis, last accessed January 29, 2025.)
Despite the stock market making new highs, and us being told on a regular basis that the American economy is in good shape, banks are writing off business loans at a rate not seen since 2020.
In the third quarter of 2024, banks’ charge-off rate on business loans was 0.56%, up significantly from around 0.12% in 2021. If we disregard 2020, the last time the charge-off rate was this high was back in 2012, when the American economy was recovering from the Great Recession.
Don’t Ignore These Early Signs
If the American economy is doing so well, why are the banks writing more and more business loans off?
Dear reader, these are early indicators of cracks in the American economy, and I strongly suggest that you not ignore them. If there’s one thing we know it’s that things can snowball very quickly once momentum picks up.
Going forward, it’ll be worth watching consumer spending data closely. If consumers stop spending, it could really derail our economy. Remember: consumers are the biggest growth drivers of the American economy.
Now, I’m not saying that an economic collapse is coming. If anything, these are early indicators that are flashing red; risks that no one seems to be paying attention to these days. If the data and news flow start turning bad, I wouldn’t be shocked to see a mass exodus in the stock market, so beware.
