4Q Battle Depends on Consumption... "Expectations for Supply Chain Resolution and Increased US Consumption"

The Key to the Global Economy Is Whether US Consumption Recovers in 4Q
Expectations Rise for Consumption Boost Ahead of Year-End Season

On the 31st of last month, one day before the start of the Korea Sale Festa, known as the "Korean Black Friday," promotional banners were hung on the streets of Myeongdong, Seoul. The Korea Sale Festa, the country's largest shopping event week, will take place for fifteen days from the 1st to the 15th of next month, during which large and small retail companies, traditional markets, and small business owners nationwide will hold discount events both online and offline. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Minwoo Lee] The U.S. Federal Reserve's (Fed) tapering (reduction of asset purchases) was announced largely as expected, leading to assessments that the market has overcome a major hurdle. Given the sharp decline in U.S. goods consumption in the third quarter and the slowdown in the recovery pace of service consumption, the key going forward is seen to be the increase in U.S. consumption in the fourth quarter.

On the 7th, Hi Investment & Securities forecasted that the stock market in the fourth quarter will hinge on the recovery of U.S. consumption. Since consumption faltered in the third quarter, there is room for a rebound, and if supply chain issues are resolved, expectations could grow even further.

In fact, the U.S. third-quarter Gross Domestic Product (GDP) recorded a weaker-than-expected result. It grew 2.0% quarter-on-quarter (annualized), which is lower than the 6.7% growth in the second quarter and also below the market forecast of 2.6%. The biggest impact came from the decline in consumption. Consumption grew only 1.6% quarter-on-quarter, significantly weaker compared to the 12.0% growth in the second quarter.

Researcher Woongchan Lee of Hi Investment & Securities explained, "Net imports continue to increase, but there was an impact from rising energy prices, and the total volume of goods imports remained almost unchanged compared to the previous quarter." He added, "Government spending also did not change significantly, so overall, the COVID-19 Delta variant and supply chain disruptions appear to have negatively affected consumption."

In third-quarter consumption, demand for goods was sluggish while demand for services increased. Particularly in goods demand, automobile consumption sharply declined by 54% compared to the previous quarter. Consumption of leisure products, including IT products, and durable goods such as furniture also decreased significantly.

Service consumption generally showed growth. However, some service sectors that were recovering from the COVID-19 impact saw their high recovery pace slow down somewhat. The recovery speed of reopening-related sectors such as recreation, restaurants, and lodging, as well as medical services, notably decreased. This is attributed to the impact of the COVID-19 Delta variant. On the other hand, sectors less affected by the Delta variant, such as housing, finance, and insurance, continued to grow steadily.

Spending levels in recreation, food, lodging, and transportation sectors remain considerably lower than before the COVID-19 pandemic outbreak. Researcher Lee said, "If these sectors recover to pre-COVID-19 levels, they could contribute more than 1.0 percentage point (annualized) to GDP growth each quarter." He added, "Although consumption sharply declined last quarter, it still exceeded the market consensus forecast of 0.9%, and there remains ample room for consumption recovery in the fourth quarter."

The key issue is whether consumption will recover from the fourth quarter through the first half of next year. Without government infrastructure investment, there is no other clear momentum in other sectors, so the key to economic recovery lies in consumption recovery. Researcher Lee emphasized, "Since the third quarter of this year, unemployment benefit payments have stopped, reducing the effect of government support funds." He continued, "On the other hand, as the spread of the Delta variant is limited, there is a possibility of normalization of reopening demand, and with the resolution of supply chain disruptions, the sharply fallen goods consumption could recover during the year-end consumption season."

In particular, various consumption stimulation events are scheduled this month. China's Guanggun Festival is on the 11th, and the U.S. Black Friday is on the 26th. South Korea has also eased social distancing guidelines this month, raising expectations for the year-end consumption season. Although U.S. consumer sector stocks are not broadly strong, Macy's, representing domestic U.S. consumption, and Airbnb, representing travel demand, are showing strength. Researcher Lee said, "Although it is regrettably difficult to identify beneficiary stocks in South Korea during the phase when U.S. service industries are performing well, it will have a positive impact across the stock market." He added, "Since the driving force of the global economy ultimately comes from U.S. consumption, the economic outcome in the fourth quarter will be decided by year-end consumption."

This content was produced with the assistance of AI translation services.