At first glance, the U.S. economy appears robust. The stock market is hitting record highs, unemployment is low, and sectors like technology are thriving. But just as a doctor might find hidden concerns during a routine checkup, a deeper examination of the economy reveals troubling signs. If we isolate certain parts of the economy—like the booming stock market—it’s easy to be optimistic. However, when we assess the economy holistically, it becomes clear that the broader picture is far less stable than it seems.
Despite the surface-level strength, critical areas—such as stock valuations, manufacturing, money supply, household debt, and shelter costs—are flashing warning signs. Much like an overworked body showing strain beneath its skin, the economy’s underlying problems are growing. If we continue to ignore the larger, interconnected issues, we risk a significant economic downturn.
Inflated Stock Market Valuations: A Misleading Indicator of Strength
The stock market is often seen as the heartbeat of the economy. It’s where fortunes are made, and where many investors look for signs of economic vitality. In recent years, technology companies like Apple, Microsoft, and Nvidia have driven the market to all-time highs, boosting the S&P 500 and NASDAQ. But while these numbers look promising, they mask a fundamental problem: the stock market is being propped up by overinflated valuations.
One of the best ways to understand stock market health is through the price-to-earnings (PE) ratio. This metric compares a company’s stock price to its earnings, giving us insight into whether a stock is overvalued or undervalued. Historically, a PE ratio between 15 and 20 has been considered normal. However, in today’s market, some companies—particularly in the tech sector—are trading at much higher PE ratios. Nvidia is currently trading at a PE ratio of around 60, Apple at 34, and Tesla at 70.
Why does this matter? Because high PE ratios are a sign that investors are betting on future growth, not present earnings. While optimism about technologies like AI and machine learning is justified, betting on what these companies might deliver years down the road creates a dangerous disconnect between stock prices and real economic performance. This kind of speculative optimism was a major contributor to the dot-com bubble of the late 1990s, which ultimately burst when companies couldn’t deliver the profits investors had anticipated.
The problem today is that the entire stock market has become disproportionately reliant on a handful of tech giants. If any of these companies falter, it could send shockwaves through the entire market. In September 2024, for example, the tech sector saw 72,000 layoffs, signaling that even industry leaders are not immune to downturns. The risk of a market correction is growing, and if investors lose confidence, the fallout could be catastrophic.
The Hidden Weakness in Manufacturing
While tech companies dominate the headlines, the manufacturing sector—a key driver of economic health—has been in decline. The Purchasing Managers' Index (PMI), which tracks manufacturing activity, has been below 50 for 23 of the last 24 months, indicating a prolonged contraction in the industry. This matters because manufacturing is often the first sector to feel the effects of an economic slowdown.
When consumer demand softens, manufacturers are forced to scale back production. Likewise, when businesses anticipate weaker economic conditions, they cut back on capital expenditures, reducing the need for manufacturing output. The PMI’s sustained weakness is a clear sign that these factors are already at play.
The manufacturing sector serves as a bellwether for the broader economy. It reflects both consumer demand and business investment, two critical pillars of economic growth. The fact that it has been contracting for nearly two years suggests that the economy is far more fragile than the booming stock market would have us believe. While tech companies may be thriving, their success does not necessarily translate to the rest of the economy.
The Explosion of M2: A Silent Threat
In addition to the contraction in manufacturing, another troubling trend is the rapid expansion of the M2 money supply. M2 includes cash, checking deposits, and near-money assets that can easily be converted to cash. Since 2020, the Federal Reserve has dramatically increased the money supply in response to the COVID-19 pandemic, leading to over $21 trillion in circulation today.
Why does this matter? When too much money is introduced into the economy without a corresponding increase in goods and services, inflation can spiral out of control. This is exactly what we’ve seen over the past few years. Consumer price inflation peaked at over 9% in 2022 before moderating slightly, but the underlying forces driving inflation—namely, the ballooning M2 supply—remain.
Inflation erodes the purchasing power of the dollar, making everyday goods more expensive for consumers. While the Federal Reserve has attempted to combat inflation by raising interest rates, these efforts have had limited success. The sheer amount of liquidity in the system has created an environment where asset prices—from stocks to real estate—have become distorted.
By flooding the market with money, the Federal Reserve has inadvertently fueled speculative bubbles across multiple sectors. The stock market and the housing market, in particular, have seen prices driven up by excess liquidity rather than by strong underlying fundamentals. This makes the economy more vulnerable to shocks, as these inflated asset prices are not reflective of real value.
Household Debt: The Ticking Time Bomb
If there’s one area that should concern policymakers and economists alike, it’s the sharp rise in household debt. In 2024, total U.S. household debt surpassed $17 trillion. This includes not only mortgage debt but also credit card debt, auto loans, and other consumer liabilities. While student loan debt has been a hot topic in recent years, it’s important to focus on the broader picture of consumer borrowing.
Credit card debt has reached record highs, and delinquencies are on the rise. As inflation eats away at purchasing power, more Americans are relying on credit just to make ends meet. The rising costs of groceries, fuel, and basic necessities have pushed families to accumulate more debt, and they are now struggling to pay it back.
Auto loans are another area of concern. During the pandemic, the price of both new and used vehicles soared, and many consumers took out larger loans to afford them. Today, many Americans are underwater on their auto loans, meaning they owe more on their vehicles than the vehicles are worth. With interest rates still relatively high, these borrowers are feeling the squeeze, and auto loan delinquencies are also rising.
The mortgage market, too, is facing challenges. Home prices have soared over the past decade, and rising interest rates have made monthly mortgage payments more expensive for new buyers. Many Americans are finding it harder to enter the housing market, and those who do are taking on larger debts than ever before. This growing debt burden is unsustainable and is likely to reduce consumer spending, which accounts for nearly 70% of U.S. GDP.
The Shelter Crisis: Housing Costs Out of Control
Perhaps no area of the economy has been more affected by inflation and excess liquidity than the housing market. Shelter costs, both for renters and homeowners, have skyrocketed. The average mortgage rate for a 30-year fixed loan is hovering around 7.2%, far higher than pre-pandemic levels. At the same time, institutional investors have been buying up large swaths of housing, converting them into rental properties and driving up both home prices and rent costs.
This is creating a vicious cycle. As homeownership becomes increasingly out of reach for many Americans, demand for rental properties surges, driving up rents. In some metropolitan areas, rents have risen by more than 30% in the past few years, straining household budgets to the breaking point. Families are now spending more than half their income on housing in many cases, leaving little left over for other necessities like food, healthcare, and savings.
The rapid rise in shelter costs is unsustainable. It not only puts a strain on individual households but also weakens the broader economy by reducing disposable income. If families are spending more on housing, they have less to spend on goods and services, which could contribute to an economic slowdown.
Conclusion: A Holistic Diagnosis
The U.S. economy in 2024 is much like a patient presenting with a seemingly minor complaint, only to reveal more serious underlying conditions upon closer examination. While the stock market may be booming and unemployment remains low, the truth is that the economy is being held up by a series of interconnected bubbles. Stock market valuations are inflated, manufacturing is contracting, the M2 money supply has ballooned, household debt is skyrocketing, and shelter costs are out of control.
It’s easy to be optimistic when looking at these parts of the economy in isolation, but when we step back and look at the economy as a whole, the picture is much more concerning. The U.S. economy is not as strong as it appears, and the risks are mounting. A market correction could trigger a cascade of crises, from falling stock prices to rising debt defaults and a slowdown in consumer spending. If we continue to ignore the warning signs, the consequences could be severe.
In future posts, we’ll explore other areas of the economy that need attention. But for now, it’s clear: the economy’s underlying ailments need to be addressed before they turn into full-blown crises.
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