Oz business owners should be watching the US closely
If you’re running a business in Australia, it’s wise now to note what’s happening in the US, for what happens with the American economy is traditionally mirrored here.
In the US as inflation climbs above 3%, economists are telling the media the middle class is buckling under the pressure of the cost of goods and services, now 25% above what they were in 2020.
In Australia the corresponding increase is about a 20% and inflation is 3.8% (which is beyond the Reserve Bank of Australia’s preferred range of 2%-3%). This would seem to ensure there’ll be no interest rate cuts to ease the cost of living before the end of this year, and some of the nation’s senior economists are saying it’s likely there’ll be no cuts and even possible rises next year.
Clearly, people making financial decisions relative to business and personal matters, should be taking these predictions into account, especially when they’re reinforced by Associated Editor of The Weekend Australian Eric Johnston, who says there could be an interest rate rise as early as May 2026. He adds: “And the bad news gets worse because there could be another some time after that. One will hurt. Two will be a new level of pain for suburban Australia -- particularly in younger households that have just been returning to a stable financial footing.”
Are we over-confident in SA?
According to BankSA’s most recent survey, consumer confidence in SA has reached its highest level in four years, but the US Conference Board’s confidence gauge has fallen for a third successive month.
Thus, our newsletter readers should be aware historical precedent suggests American consumers’ loss of confidence will be duplicated by Australian consumers in the not-too-distant future.
Bear in mind too, that if rates rise again, the unemployment rate will rise also. While unemployment wasn’t a significant problem during the last rate cycle, it seems certain to be one next time because the increasingly rapid rollout of AI software is already causing white collar job losses.
In the context of a slowing economy and weakening labour market, American economists are warning of darkening prospects for next year’s March quarter.
Looking further ahead, expectations for employment in the US have softened. Increasing numbers of consumers are forecasting there will be fewer jobs available in coming months and they’re pessimistic about household incomes.
Indeed, many business analysts claim the US is already in recession, and Stephanie Guichard, a senior Conference Board economist, says consumers’ write-in comments are consistently led by concerns referencing prices and inflation -- concerns that are escalating in Australia.
Macks Advisory understands that HSBC executives have recently set aside $1b to cover expected credit loses that include more than $100m for a single Middle East client.
While understandably Wall Street executives are trying to dismiss fears of a brewing credit crisis, we nonetheless understand some of the finance industry’s biggest names are setting aside hundreds of millions of dollars to cover what they see as forthcoming potential losses.
Clearly President Trump was expecting his tariff regime would turn around America’s slowing economy, an expectation dashed by the US Supreme Court’s 6-3 November 8 decision, that under Section 301 of the Trade Act of 1974 he has had no authority to impose many of the tariffs he’s been imposing.
The Court’s decision, which effectively nullifies a significant proportion of tariffs levied against America’s key trading partners, therefore prompts this question. How, having paid billions of dollars in expected compensation claims from illegally tariffed countries, will the Trump Administration find extra money it was counting on, not only to boost slowing economic growth but service a national debt already escalating beyond a staggering $37.85 trillion?
Middle class “buckling”
When US economists, as stated earlier in this newsletter, said America’s middle class was “buckling” in the current economic climate, they were referring to a broad cross section of people that includes, for example, white collar office employees, nurses, and plumbers, a sector which the Pew Research Centre defines as people in households with annual incomes of between $66,666 and $200,000 – depending on where they’re situated.
In Australia, middle class households are often defined as those with annual incomes of between $45,000 and $120,000, and we suggest a recently published newspaper report about Atlanta resident Holly Frew, a college director of communications with a household annual income of $US135,000 ($AUS209,000), relates closely to what Australians in comparable households are beginning to feel in increasing numbers.
She was quoted as saying: “Life felt more doable a year and a half ago, and I need to know where the light is at the end of this tunnel”. We wonder how many times newsletter readers have recently heard similar sentiments expressed here.
A few more words about AI: sales of the software in the US have so dominated stock markets as to reveal some serious deficiencies in other aspects of the economy. The government faces a dilemma. Should it do nothing and see what happens if the bubble bursts or should it introduce measures that would yield more stable growth?
Trouble is government intervention risks triggering a damaging market correction that would accelerate a trending downturn.
Given the speed of Australia’s rollout of AI, America’s experience is yet another reason why we’ re suggesting operators of businesses here should be keenly watching what’s happening there.
Macks Advisory has no wish to be disseminators of pre-Christmas doom and gloom. However, when there have been authoritative public statements that the US is already in recession, that the RBA won’t be reducing interest rates any time soon but could well increase them, then we feel obliged to offer information to newsletter readers that could usefully influence their decision-making.
Furthermore, we’re aware these matters are being discussed freely at the highest echelons of the nation’s major commercial banks.
