According to the precepts of Stephen Jen’s “dollar smile” theory, the greenback tends to rise in value during periods of extreme economic performance – on both ends of the spectrum – and fall in value during periods when the US is growing more slowly than its global counterparts. It seems that just such a “muddle through” scenario is set to unfold, with all of the major components of domestic demand showing signs of exhaustion after an outsized post-pandemic recovery.

Fiscal policy at the state and local levels is still providing unexpected stability, and aggregate incomes are rising more quickly than inflation – providing the fuel for continued strength in consumer spending and real estate market activity. But as higher financing costs bite, homebuilding activity is stabilizing at lower levels. High-frequency data suggests consumer spending is beginning to fall as excess savings held by lower-income households – those with the greatest marginal propensity to spend – evaporate and are replaced with new debt. With delinquency rates pushing higher and student-loan forbearance programs set to end in September, headwinds are building for investment, inventory accumulation, and corporate profit margins.
Perhaps most importantly, recent data releases point to a softening in labour market conditions, with benefit claims rising, job openings falling, wage growth slowing, and hiring volumes reverting toward normal replacement levels. We expect most major sectors in the US to be showing signs of strain by the end of the third quarter, putting the conditions in place for a short-lived narrowing in global growth gaps.

Job openings and unemployed, total, thousands, seasonally adjusted