As several of the world’s largest economies enter recession, the United States continues to thrive.
Both Japan and the United Kingdom indicated Thursday that their economies will most likely deteriorate in the final three months of 2023. For each, it would be the second quarter in a row, which meets one lay definition of a recession.
However, the US economy accelerated in the fourth quarter of last year, marking the sixth consecutive quarter of expansion. It blew past many projections heading into last year that a recession was unavoidable due to high interest rates designed to slow the economy and inflation.
Give most of the credit to American consumers, which have continued to spend at a steady rate despite several problems. Their spending accounts for the majority of the US economy. Government support helped households survive the pandemic’s early phases and a spike in inflation, and now wage hikes are helping them catch up with high costs for the products and services they require.
On Thursday, a study revealed that fewer Americans claimed for jobless benefits last week. It’s the latest indicator of a fairly strong employment market, despite recent layoff announcements. Continued strength should support the economy.
Of fact, concerns remain, and experts believe a recession cannot be ruled out. Inflation might pick up again. Worries over the US government’s massive borrowing might disrupt financial markets, making loans to buy automobiles and other items more costly. Growing losses from commercial real estate might cause significant pain for the banking system.
For the time being, however, the picture for the United States appears to be better than that of many other major economies. The attitude on Wall Street is so upbeat that the S&P 500 index, the primary barometer of the US stock market, surpassed 5,000 last week for the first time.
“First and foremost, it’s important to emphasise that the market’s performance is more a reflection of a thriving economy rather than unwarranted ‘animal spirits’ from investors,” says Solita Marcelli, chief investment officer, Americas, at UBS Global Wealth Management.
When the International Monetary Fund raised its projection for global growth in 2024 a few weeks ago, it highlighted stronger-than-expected resilience in the US economy as a primary factor.
According to economists, the United States’ economy has been shielded from recessionary storms by a number of distinguishing qualities. The US government offered almost $5 trillion in pandemic relief in 2020-2021, greatly exceeding its international counterparts, leaving most households in far better financial health and supporting consumer spending long into 2023.
The Biden administration has also subsidised the building of industrial plants and infrastructure through new legislation issued in 2021 and 2022, which was still in effect last year. Government expenditure accounted for almost one-quarter of the US economy’s robust 2.5% growth in 2023. However, Republican critics argue that the increased expenditure contributed to rising inflation.
“We had some policies that I do think helped us a lot,” said Diane Swonk, KPMG’s head economist. “But also the structure of our economy is so much different.”
Americans have been more insulated from increasing interest rates than their British counterparts, for example, because the majority of US homeowners with mortgages have lengthy, 30-year fixed rates. As a result, the Federal Reserve’s quick rate rises over the last two years, which have raised mortgage rates from roughly 3% to 6.7%, have had no impact on many American homeowners.
However, their British counterparts have mortgages that need to be renewed every two to five years. They’ve suffered with fast rising mortgage rates as the Bank of England increased borrowing prices to combat inflation.
Catherine Mann, a member of the Bank of England’s interest-rate-setting committee, said Thursday that the UK economy’s downturn is expected to be transitory. Business surveys already show that the economy is recovering, she noted.
“The data we have today is the rear-view mirror,” she remarked on the margins of a Washington economic conference. Future-oriented reports “are all looking good.” The Bank of England, like the Fed, is considering lowering its benchmark interest rate once it is certain that inflation is under control.
Another advantage for the United States is that it has seen an increase in immigration in recent years, making it simpler for businesses to fill jobs, perhaps expand their operations, and result in more people earning salaries — and then spending those earnings.
Japan, on the other hand, is fast ageing and has been losing population for years as it becomes less accessible to foreign labour. A diminishing population can have a significant negative impact on economic growth.
Consumer mood in Europe remains low, with many people still suffering the consequences of increasing energy costs caused by the war in Ukraine.
Even China, whose economy is rising faster than the United States’, is facing significant strain. Its stock markets have recently been among the world’s worst, owing to concerns over a slowing economic recovery and problems in the real estate industry.
The US economy is facing its own issues. Its growth is expected to slow this year as the Federal Reserve’s significant interest rate rises work their way fully through the system.
A report on Thursday may have alluded to this. Retail sales in the United States fell more than predicted in January compared to December.
Some of the foundations that underpin consumer spending may be deteriorating. Student loan repayments have begun, people have mostly spent their economic stimulus funds, and credit card balances are high.
Perhaps most aggravating is the fact that market prices remain far higher than they were prior to the outbreak. Lower inflation implies that prices will rise more slowly from here, rather than dropping back to their previous levels.
According to a new Morgan Stanley poll, coping with inflation remained the top concern of US consumers, with the exception of those earning more than $150,000.
When McDonald’s CEO Chris Kempczinski announced his company’s most recent quarterly results, he stated that he is not seeing any change in behaviour among middle- and upper-income consumers. However, “where you see the pressure with the US consumer is that low-income consumer, so call it $45,000 or less.” “That consumer is under pressure.”