How “Girl Power” Kept the U.S. From Recession

Economies worldwide have thus far managed to steer clear of a recession, but the ongoing sustained decline in the global manufacturing sector paints a more complex picture. This phenomenon is succinctly explained by the above statement from Best Buy’s CEO.

[the] consumer electronics industry… remains challenged due to the pull-forward of demand in prior years and the various macroeconomic factors that we are all too familiar with…Our industry continues to experience lower consumer demand due to the pandemic pull-forward of tech purchases and the shift back into services spend outside the home like travel and entertainment…  – Best Buy Earning Release & Conference Call, Aug 30th.

On a global scale, consumers are still transitioning from the significant surge in durable goods purchases during the COVID era to services. Furthermore, consumers face various macroeconomic challenges, including elevated inflation rates, mounting interest rates, a tightening monetary policy, and slowing economic growth.

Moreover, the growing weakness of the global consumer is another driving force behind the prolonged downturn in the consumer electronics industry. We anticipate that this sector will face challenges until mid-2024 when central banks begin to reverse their restrictive monetary policies and initiate interest rate cuts to stimulate demand.

It’s worth noting, however, that many non-cyclical sectors are thriving within the electronics industry thanks to ongoing secular growth trends. These include electric vehicles, healthcare technology, renewable energy infrastructure, and cloud computing. These sectors are faring considerably better in the current economic landscape

The Swiftie/Barbie Economy

In his Axios article titled “The Economy Runs on Girl Power,” Felix Salmon argues that Taylor

Swift’s “Eras” tour, along with the record-breaking box office sales of the “Barbie” movie, has significantly boosted spending on services and helped the U.S. economy steer clear of a recession.

Salmon also observes that “among the 69 markets monitored by Moody’s for hotel performance, those that featured a stop on the ‘Eras’ tour witnessed a notable upswing in revenue per available room compared to the same month in the previous year.”

He further posits the U.S. economy during the summer was driven by a novel equation:

Taylor Swift + Barbie = Goldilocks

The equation alludes to an economy characterized as “Goldilocks,” where conditions are neither excessively hot nor excessively cold, which fairly portrays the current economic climate in the United States. 

Undoubtedly, the Swiftie/Barbie economy was reflected in the latest ISM services PMI,  which unexpectedly jumped to 54.5 in August 2023, indicating the most robust growth in the services sector in six months. The price component came in quite hot, putting a dent in Goldilocks theme, however. 

Manufacturing vs. Services

Manufacturing of durable goods typically dominates economic headlines, owing to its tangible nature and the availability of extensive historical data. For instance, the straightforward process of tallying durable goods production on an assembly line starkly contrasts the intricate challenge of quantifying services. While dentists can quantify filled teeth, measuring the output of customer service reps or auto mechanics performing a range of tasks is far from straightforward. Services like housekeeping, investment advice, teaching, and writing present complexities in output measurement.

Nonetheless, it’s essential to recognize that services constitute the lion’s share of economic activity, contributing over 70 percent of GDP in OECD nations. As we are currently observing, services play a pivotal role in driving economic growth and often serve as a vital counterbalance to a weakened manufacturing sector.

The service sector in the United States continues to display relative robustness. Conversely, the Eurozone recently experienced its first contraction in the services Purchasing Managers Index (PMI) since the preceding December. This contraction rate is the swiftest since February 2021, with all four major Eurozone economies reporting declines.

Recognizing that factories are driven primarily by actual unit sales, not the nominal dollar spending figures is crucial.

The Ratio of Consumption of Durables to Services chart further underscores this trend, revealing that in July, .26 units of durables were consumed for every unit of services, a decline from the peak of .30 but still an increase from the pre-COVID level of .20. When considering nominal consumption of durables, which accounts for prices, it currently stands at $.18 for every $1.00 spent on services. This marks a decrease from the peak of $.22 for every dollar of services consumed but is an improvement from the pre-pandemic figure of $.15.

The chart also highlights that the consumer preference mix between durables and services, as depicted by the ratio, requires further adjustment to return to its long-term trendline.

Price Trends

Both charts above implicitly depict the shifting dynamics in relative prices between durables and services, a trend further illustrated in our chart, Implicit Price Deflator Index: Durables vs. Services.

Notably, the price of services exhibits a persistent upward trajectory, while the extended downward trend in durable prices saw a reversal during the pandemic and continues to seek their equilibrium levels

To underscore the contrasting trajectory of durable and service prices, we’ve assembled a table comparing the inflation rates of computers and televisions with those of medical services and college tuition. The findings are remarkable: there has been an almost 90 percent price reduction for durables and a corresponding 100 percent increase for services since 2005.

Upshot

Our analysis concludes that the ongoing shift in consumer preferences toward favoring services over durables has yet to run its course fully.

More importantly, a critical factor in revitalizing the manufacturing sector is reversing the macroeconomic headwinds confronting global consumers, a topic we delve into further in our country-specific outlooks below.