After the Thanksgiving celebration, consumers began shopping in physical stores or online. According to initial estimates, spending on Black Friday and Cyber Monday broke records. With unemployment at historic lows and savings still piling up from the pandemic, family spending has kept the U.S. economy spiraling out of control. Despite interest rate hikes, international conflicts, banking unrest, strikes and other setbacks, the US economy remained strong. “The biggest surprise for the U.S. economy this year has been its resilience and, in particular, its growth,” Tiffany Wilding, an economist at Pimco, said via video conference, but warned that risks have shifted to 2024.
This Wednesday, the Commerce Department’s Bureau of Economic Analysis raised its gross domestic product (GDP) growth estimate for the third quarter to an impressive annual pace of 5.2% (quarterly growth of about 1.3%), the highest rate on record 2021. Meanwhile, inflation has fallen to 3.2% and the unemployment rate has been below 4% for 21 months, the best increase in 60 years.
The President of the United States, Joe Biden, joked about bad omens a few months ago. “I heard every month that there was going to be a recession next month. “I don’t think that’s the case,” he said in June. Many economists, including Federal Reserve technicians, had written a recession chapter in their playbook for this year, but the plot has taken its own course. “No one would have thought that interest rates could rise so quickly without the U.S. economy falling into recession or, more importantly, without a major market crash like the LTCM fund collapse in 1998 was the case,” comments Yves Bonzon, Head of Investments at the Swiss private bank Julius Baer.
Wilding’s explanation is that the U.S. fiscal response to the pandemic has been much more aggressive than other developed markets. The excess savings due to large public transfers and reduced spending due to the lockdown “were a much greater shock absorber than anyone expected.” In addition, there were some improvements on the supply side, such as the increase in the labor force due to the arrival of immigrants and the higher employment rate.
Brake in sight
Somehow the bad omens were just postponed. Experts expect the economy to begin slowing after the summer slowdown, and some believe the risk of a recession remains very high in 2024. In the third quarter, “growth was driven primarily by a sharp increase in consumer spending, as well as extraordinary contributions from stockpiling and public spending. “These three factors appear set to disappear in the coming quarters,” said Michael Pearce, chief U.S. economist at Oxford Economics. “Those excess pandemic savings boosted growth this year, but they are slowing,” Wilding says.
After analyzing several similar episodes in different countries over the last 70 years, the Pimco economist emphasizes that when monetary policy was tightened so aggressively on the basis of such high inflation as in this case, “90% of these cycles of interest rate increases ended”. in recession.” “Just from historical experience, without knowing anything else, we are in a time when the probability of a recession is higher than normal. Where would we place this probability? Like a coin toss.” Wilding believes that markets are now underestimating this risk and are becoming too complacent.
“GDP forecast models based on available data predict a significant slowdown in economic activity in the fourth quarter,” said Christopher Waller, adviser to the Federal Reserve, this Tuesday at an event at the American Enterprise Institute in Washington. The banker pointed to a growth forecast of an annual rate of 2.1% in the fourth quarter, which was in line with the first half of the year but less than half that of the third. “One thing that significantly increased GDP in the third quarter was the buildup of inventories, which are quite volatile quarter to quarter,” Waller warned.
“We still do not know the full extent of the impact of tightening monetary policy and financial conditions on economic activity and inflation,” Michelle Bowman, also a Federal Reserve adviser, admitted in another speech. He explained that the interest rate increases were reflected in small business loans and corporate bonds, but also in slightly higher delinquencies on credit cards and auto loans. However, the presence of cash buyers in the real estate market has partially reduced sensitivity to interest rates in the real estate sector. “In addition, many households continue to have significant excess savings and continue to generate savings through mortgages taken out or refinanced during periods of low interest rates,” it said.
Bonzon agrees that interest rate hikes have had little impact, even in sectors that are very sensitive to the price of money, such as housing. “In fact, U.S. households spent a decade rebuilding their wealth after suffering a huge negative wealth shock in 2008. Then, when the pandemic hit, direct government transfers and asset inflation further strengthened the health of their balance sheets,” he adds.
The economist points out that Americans currently have $174 trillion in wealth, compared to $85 trillion before the global financial crisis that began in 2007, according to JP Morgan Asset Management. Their debt amounts to $20 trillion, two-thirds of which is mortgages with an average fixed interest rate of 3%. “The interest rate adjustment therefore had little impact on American households,” he concludes.
At the December meeting, the market almost ruled out another interest rate hike. Many are starting to think more about when interest rate cuts will begin, as evidenced by the sharp rise in Treasury bond prices in November (with falling yields) and the weakening of the dollar to its lowest level in three months. The Federal Reserve’s Dec. 13 meeting is likely to provide insight into how the central bank views the outlook for 2024, an election year. Of course, there is no guarantee that it will be correct.
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