The Remarkably Resilient US Economy

After the Thanksgiving celebrations, American consumers eagerly flocked to brick-and-mortar stores and online stores to go on a shopping spree. Initial estimates suggest that spending on Black Friday and Cyber Monday broke previous records. With unemployment rates at historic lows and some savings left over from the pandemic, household spending has allowed the U.S. economy to consistently exceed expectations. Despite high interest rates, international conflicts, banking problems, labor strikes and other obstacles, the US economy was surprisingly robust. “The biggest surprise for the U.S. economy this year has been its remarkable resilience and, in particular, its growth,” said PIMCO economist Tiffany Wilding, who nonetheless noted some risks for the year ahead.

The U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) recently increased its estimate for gross domestic product (GDP) growth in the third quarter to an impressive annual rate of 5.2% (quarterly growth of about 1.3%). This is the highest growth rate since the end of 2021. In addition, inflation has fallen to 3.2% and the unemployment rate has been below 4% for 21 months, marking the longest increase in 60 years.

President Joe Biden joked about the dire economic situation a few months ago. “I’ve heard every month that there’s going to be a recession next month – I don’t think so,” he said in June. The Federal Reserve and many other economists had expected a recession this year, but things turned out differently. “Few expected that interest rates could be raised so quickly without triggering a US economic downturn or, more importantly, without causing a massive failure like the LTCM [Long Term Capital Management hedge fund] “The collapse in 1998,” said Yves Bonzon, head of investments at Swiss private bank Julius Baer.

Wilding explains that the U.S. fiscal response to the pandemic has been more aggressive compared to other developed economies. The excess savings from large stimulus payments and reduced spending during the lockdown acted as “unexpectedly strong shock absorbers”. Wilding also noted improvements on the supply side, such as the influx of working-age immigrants and the associated downward pressure on wages.

US Federal Reserve Chairman Jerome Powell.Carolyn Kaster (AP)

Roadblocks ahead

But perhaps all the bad omens were just postponed. After a strong summer, experts expect the economy to begin to slow, with some predicting the risk of recession remains high in 2024. In the third quarter, growth resulted primarily from increased consumer spending, inventories and government spending. However, these factors are likely to diminish in the coming quarters, according to Michael Pearce, chief U.S. economist at Oxford Economics. “Those excess pandemic savings boosted growth this year, but they are slowing,” Wilding said.

Wilding’s analysis of similar events around the world over the past 70 years shows that aggressive monetary tightening due to high inflation has historically led to recessions 90% of the time. “Based on historical experience alone, we are now in a time where the likelihood of a recession is higher than normal,” she said. “How probable?” “It’s a coin toss.” Wilding believes markets are becoming too complacent in underestimating this risk.

“GDP forecast models predict a significant slowdown in economic activity in the fourth quarter,” Federal Reserve Adviser Christopher Waller said at a recent American Enterprise Institute event. Waller pointed to a 2.1% growth forecast for the fourth quarter, consistent with the first half of the year but less than half of the growth in the third quarter. “A key factor contributing to the GDP increase in the third quarter was inventory levels, which can vary significantly from quarter to quarter,” Waller warned.

“We are still not sure what the full impact of tightening monetary policy and financial conditions will be on economic activity and inflation,” said Michelle Bowman, another Federal Reserve adviser. Bowman noted that interest rate increases primarily affected small business loans and corporate debt, and led to slightly higher delinquencies on personal credit card debt and auto loans. However, cash buyers in the real estate market have reduced interest rate sensitivity in real estate. “Many households still have excess savings and benefit from low-interest mortgages,” she added.

Bonzon admits that interest rate increases will occur even in sectors that are very sensitive to such changes, such as: B. residential real estate, had only minimal impact. “After a significant decline in wealth in 2008, U.S. households spent the next decade rebuilding,” he said. “Then came direct government stimulus payments and asset inflation during the pandemic, which further strengthened their finances.” Americans now have $174 trillion in wealth, up from $85 trillion a year, according to JP Morgan Asset Management 2007 before the global financial crisis. Their debt totals $20 trillion, two-thirds of which are mortgages with an average fixed interest rate of 3%. “The interest rate hikes had minimal impact on American households,” Bonzon said.

The possibility of another rate hike by the Federal Reserve in December was largely ignored by markets. Instead, attention is shifting to the timing of rate cuts, as evidenced by the sharp rise in Treasury prices (leading to falling yields) and the recent weakening of the dollar to its lowest level in three months. The Federal Reserve’s Dec. 13 meeting is expected to provide insight into its outlook for 2024, which is also an election year. But in the world of economic forecasting, there are no guarantees.