America’s economy is booming. So why are bosses worried?

Athe American stock market is on a tear. Over the past three months, the S&P The 500 index of large companies soared by almost 15%, reaching a record level (see chart 1). Recent economic data supports investor optimism. On February 2, the Labor Department announced that 353,000 jobs were created in January, far more than expected. The economy grew at a healthy 3.3% (annual rate) in the final quarter of 2023. Despite this, inflation slowed to 2.6% according to the measure favored by the Federal Reserve, not far from its target by 2%. Investors are now betting that by the end of the year, the Fed will lower its benchmark interest rate from its current range of between 5.25% and 5.5% to below 4%, giving a boost to the American economy – and with it to America Inc.

image: The Economist

However, this bet is by no means infallible. On January 31, Fed Chairman Jerome Powell dashed hopes of an imminent rate cut, arguing that inflation was “still too high.” As cheap pandemic-era debt begins to mature, the interest bill on US non-financial corporate debt of $21 trillion will continue to climb. Profits are more or less stagnating. In the last quarter of last year, which S&P. 500 companies are currently reporting their growth, representing a modest growth of 1.6% year-on-year. What's more, three of the forces that have sustained profits may now be weakening.

American consumers are a source of concern. Some of the fuel that sent consumption soaring, confounding expectations of a recession in 2023, is running out. Excess savings accumulated by buyers during the pandemic, in part thanks to government stimulus checks, have now largely been spent, according to a recent paper by François de Soyres and co-authors at the Fed. Credit card default rates have continued to rise. Student loan payments, which resumed last October after the Supreme Court overturned a moratorium imposed during the pandemic, are adding to the pressure on wallets.

As a result, sellers of discretionary goods are bracing for tough times ahead. On January 23 Wayfair, an online furniture store, announced it would lay off 13% of its staff in response to “ongoing category weakness,” just weeks after its boss sent an inspiring Christmas note to the staff extolling the joys of “working long hours”. » and “mixing work and life”. On January 25, Levi Strauss, maker of America's favorite jeans, said it expected revenue growth of between 1 and 3 percent this year, below what analysts had forecast, and announced that it would lay off 10 to 15% of its workforce. On January 30, home appliance maker Whirlpool said it expected like-for-like sales to be flat in 2024.

On the same day, Mary Barra, head of General Motors, America's largest automaker, happily predicted that the number of cars sold in the United States would increase by 3% this year – not bad, but well below from last year's 12% increase. And prices are expected to fall to support demand, squeezing margins just as automakers digest rising costs resulting from a new wage deal won by their union workers late last year. U.S. consumers are also moving more slowly toward more expensive electric vehicles (VEs) than what the car manufacturers had planned. On January 24, Tesla, the American company VE champion, warned that its growth “could be significantly weaker” this year. Its shares plunged 12% in response, wiping $80 billion from its market value.

Even sellers of basic consumer goods are exercising caution. Over the past two years, makers of packaged food and various household essentials have managed to protect their profits from rising costs by raising prices without crushing demand. This strategy now appears to be exhausted. On Jan. 26, Colgate-Palmolive, a toothpaste supplier, said it expected sales growth of between 1% and 4% this year, up from 8% last year. On January 30, Mondelez, a confectioner, estimated its turnover growth for 2024 between 3 and 5%, compared to 14% in 2023.

A second concern for some companies is the health of consumers in China. The collapse of the country's real estate sector has weighed on consumer confidence. In December, Nike's stock price plunged after the company reported slowing sales growth in China due to “increased macroeconomic headwinds.” A Jan. 29 order by a Hong Kong court requiring Evergrande, once China's largest property developer, to liquidate could further sour the mood. The next day, Laxman Narasimhan, boss of Starbucks, an American coffee chain, warned that “a more cautious consumer” in China was weighing on its growth. Even though Apple, the iPhone maker, managed to post 2% year-over-year growth in the final quarter of last year, its sales in China fell 13%. For Apple, Nike and Starbucks, increased local competition adds to their woes.

image: The Economist

In the United States, the American manufacturing boom also appears to be slowing – a third source of concern for the year ahead. In the first half of last year, monthly U.S. factory construction jumped 17%, adjusting for inflation. In the second half, this growth slowed to 8% (see graph 2). TSMC, a Taiwanese electronic chip manufacturer, announced on January 18 that it would delay the opening of a second semiconductor factory in Arizona by one or two years. She had already delayed the first one in July. On February 1, it was announced that Intel, an American chipmaker, would delay the opening of a factory in Ohio. This may be because the subsidies promised by the Biden administration have been slow to materialize. Of the $52 billion designated in the CHIPS Act to support domestic semiconductor production, only a small fraction has been allocated so far. US automakers are also postponing investments in VE production in response to disappointing demand. That could start to weigh on factory builders and suppliers who have benefited from the boom.

I think AI can

One area of ​​business that shows no signs of slowing down is artificial intelligence (AI). Amazon, Alphabet and Microsoft, the US cloud computing triumvirate, reported year-over-year growth in their cloud divisions of 13%, 26% and 30% for the final quarter of last year, fueled by partly driven by growing customer demand for cloud computing. computationally intensive technology. All three told investors that their lofty ambitions for AI would lead them to increase their capital investments in the coming year. On February 1 Meta, which also houses AI ambitions, reported blockbuster profits and said it would spend up to $37 billion this year, much of it on data centers to train and manage. AI models. Unlike its previous investment spree, on its unloved virtual reality metaverse, investors benefited — just as they learned the company would buy back more shares and pay its first-ever dividend. The next day, Meta's market value soared nearly $200 billion, reaching $1.2 trillion, the largest single-day gain in Wall Street history.

It may be some time, however, before the rest of American companies see an improvement in their bottom lines thanks to AI. According to a recent survey conducted by BCG, a consulting firm, only 5% of companies do nothing at all with technology. But 71% of them are simply “pursuing limited experiments and small-scale pilot projects.” As America Inc runs out of other fuels, more such pilots may be needed to ensure a smooth journey.

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