The Bwam Conundrum: A Tale of Two Growth Rates

The recent employment growth rates in the US have been moderate, but a closer look reveals that they are unlikely to be sustained at current levels. This is because spending growth by households and businesses is facing significant headwinds.

Households, despite decent employment growth, are struggling with weak wage growth due to high unemployment rates. Businesses, on the other hand, are expected to see weaker demand both domestically and internationally.

The Disconnect Between Spending and Income

The data shows that household spending has been strong in recent months, but this is largely driven by disposable income growth. However, disposable income growth is likely to slow down due to weak wage growth and a modest fiscal drag.

As seen in the chart below, real household plus business spending growth (Q/Q ann) and employment growth have been closely linked. If spending slows as expected, employment growth rates will likely follow suit with the usual lag.

-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 90 92 94 96 98 00 02 04 06 08 10 -8% -6% -4% -2% 0% 2% 4% 6% Real household + real business spending grow th (Q/Q ann) Employment grow th (3m annualized)

The Impact on Business Spending

Businesses are also expected to see weaker demand for their goods and services. Household demand is likely to weaken due to the reasons outlined above, while external demand has already slowed substantially.

The chart below highlights the divergence between strong spending and weak income growth.

-6% -4% -2% 0% 2% 4% 6% 8% 90 93 96 99 02 05 08 11 -30% -20% -10% 0% 10% 20% 30% Real PCE 6m Change AR Real Business Fixed Investment 6m Change AR

Portfolio Implications: Time to Rebalance?

The implications for portfolios are clear. With employment growth rates unlikely to be sustained, investors should consider rebalancing their portfolios to reflect the changing economic landscape.

C, GS, and BAC may see increased volatility due to the expected slowdown in spending growth. AGG, on the other hand, could benefit from a decrease in interest rates as the economy slows down.

Actionable Insight: Prepare for the Slowdown

Investors should prepare for the expected slowdown by reducing exposure to high-risk assets and increasing cash allocation. This will provide a buffer against potential losses and allow for more flexibility in the face of changing economic conditions.

By taking a proactive approach, investors can minimize losses and potentially benefit from the opportunities that arise during times of economic uncertainty.