U.S. consumers are ‘walking towards a cliff’ and the jobs market is beginning to ‘fray at the edges,’ warns market strategist

Forget about the blistering pace of economic growth in the United States this past quarter: Americans are hurting, and one market strategist believes life might be about to get a whole lot worse. Speaking to CNBC’s Squawk Box Europe, Longview Economics founder Chris Watling argues U.S. households are “walking towards a cliff, basically” and warned the excitement around strong retail sales is not justified. That poses a problem for U.S. growth as spending by consumers accounts for over two-thirds of the economy. “They’re running out of cash. If you look at excess savings they’ve been run down quite hard,” said Watling, who serves as Longview’s CEO and chief market strategist. “If you look across the income quartiles, the bottom…quartiles are under pressure, [and] probably [have] spent all that excess savings.” Indeed, backward-looking data suggests U.S. households appear to be in robust condition. According to predictions from the U.S. Census Bureau, retail and food services sales for September 2023 will hit $704.9 billion, up 0.7% from the preceding month and 3.8% higher than a year ago. Wall Street also enjoyed a slew of positive third-quarter updates from major retailers. Just this week Amazon enjoyed a 13% bump in revenue, while Unilever reported underlying sales growth was up 5.2%. Watling is unconvinced by such sales success, saying it has been buoyed by a household savings ratio that is now dwindling. The London-based analyst isn’t alone in this observation. Citigroup CEO Jane Fraser believes “cracks” are beginning to appear in consumer spending, while Bank of America CEO Brian Moynihan suggested customers have now reached a tipping point. “So it’s not quite all good news,” Watling continued. “Quite the reverse, I think there are some real challenges coming for the U.S. consumer.”

Labor market ‘fraying at the edges’

While the nation’s economy expanded at a 4.9% annual rate from July through September, its fastest in nearly two years, Watling added that some economic indicators are hinting at troubles beneath the surface. Among them are car repayment delinquency rates for risky borrowers, which have pushed to the highest figure in three decades. Also worrying is a slowdown in the Kansas City Fed’s Labor Market Conditions Indicators (LMCI), which saw momentum drop into negative numbers earlier this year. “The labor market’s under a lot of pressure,” said Watling. “We had a good payrolls month, but if you look at a lot of the indicators of where the labor market’s likely to go, a lot of them are fraying at the edges—they’re quite soft.” Continued pressure on both consumers and the labor market could be what “kick-starts” a recession in the U.S. economy, Watling added. “Bond King” Bill Gross is similarly unconvinced by the seemingly positive picture some datasets are painting. Earlier this week Gross, former chief investment officer of Pacific Investment Management Co., or Pimco, tweeted that he was predicting a recession in the fourth quarter and urged his followers to return to the bond market. Watling added that a further headache for the U.S. economy will be its stock market in the coming months, which he believes is massively overpriced. When asked about the impact of this shaky consumer on Wall Street, he replied: “From our point of view, though, I can see a bounce for a month or two. It’s been quite beaten up; markets have been coming down since July, but I think net-net, you want to be underweight equities if you are looking beyond the next few months. “Particularly, the U.S. equity market is too expensive; it’s overvalued…The U.S. in aggregate is overvalued—tech’s overvalued.” He finished: “I think the U.S. is in for tough times.”