U.S. Economy Shows Clear Path to Stability After Pandemic-Era Volatility

April 5, 2024, New York—The U.S. economy, having navigated the tumultuous times of the COVID-19 pandemic with significant confusion and uncertainty, is now demonstrating signs of a return to normalcy. Several key indicators are aligning with or surpassing their long-term potential.

Manufacturing Sector Returns to Growth

A pivotal indicator, the manufacturing sector, which had experienced a 16-month period of contraction—a situation historically aligned with economic recessions—has now shown signs of modest expansion as of March. This turnaround is particularly notable as the ISM purchasing managers' index, a key measure of manufacturing health, reflects this positive change, challenging the precedent where a contraction period of more than 14 months typically signaled a recession.

Supply Chain and Consumer Spending Stabilize

The global supply chain disruption index, managed by the New York Fed, has returned to its long-term average since November 2023, marking a significant recovery from pandemic-induced volatility. This stabilization has been crucial in allowing the U.S. economy to regain its footing, especially as the goods-to-services spending rotation finds a new equilibrium in 2023, after enduring two years of significant shifts.

Consumer Confidence and Excess Savings

Consumer confidence, a metric long debated and watched by economists and policymakers alike, has begun to rise in recent months. This resurgence is supported by the normalization of consumer balance sheets and the depletion of "excess savings," a term denoting the surplus personal savings accumulated during the pandemic. The latest figures from the San Francisco Fed indicate that the excess savings measure is verging on zero, suggesting a return to pre-pandemic spending habits.

Labor Market Tightness Eases

The labor market, while still displaying signs of tightness, notably mirrors the conditions seen in 2019 more closely than the highly fluid market of 2021-22. Data from the Job Openings and Labor Turnover Survey (JOLTS) reinforce this trend, showing a labor market that has settled into a rhythm reminiscent of pre-pandemic years, with Goldman Sachs' labor market tightness tracker indicating a return to 2019 levels.

Housing Market Remains an Anomaly

Amidst these signs of economic normalization, the housing market continues to face challenges, primarily due to high interest rates. This has resulted in a freeze in the market, with existing homeowners reluctant to sell and mortgage demand suppressed. The Federal Reserve's cautious stance on rate adjustments reflects the delicate balance between fostering economic growth and avoiding inflationary pressures.

Utilities Sector: A Potential Turnaround?

In a surprising twist, the utilities sector, often seen as a stable investment choice, has underperformed, trailing the S&P 500 index by 38 percentage points since the rally began in October 2022. This underperformance might signal an opportunity for a mean reversion, suggesting potential growth opportunities for investors in this traditionally steady sector.

As the U.S. economy moves towards greater stability and predictability, it carries forward the lessons of resilience and adaptability learned during the unpredictable pandemic era. With key sectors showing signs of recovery and consumer confidence on the rise, the economic outlook appears increasingly optimistic, though careful navigation remains essential in areas such as housing.