Unexpected factors shaping the American economic landscape

Unexpected factors shaping the American economic landscape

Recession in the United States of America

While the coordinated tightening of global interest rates has slowed economies around the world, the United States, despite its high interest rates, is defying expectations of deflation. Getty Images

In the midst of a strong US economy, the usual pessimists are remarkably silent. Michael Burry, of “Big Short” fame, and Nouriel “Dr. Doom” Roubini — both typically bearish — were conspicuously quiet on the turbulent expectations front.

With the US economy up 4.9%, the bears appear to have gone into early hibernation, as there is no immediate sign of weakness in the pillars of strong employment and healthy household spending.

“It was a complete explosion that no one would have expected even three months ago,” says Olu Sunola, head of US regional economics at Fitch Ratings. luck. “A tight labor market and strong consumer balance sheet also mean the economy will continue for some time to come.”

While the coordinated tightening of global interest rates has slowed economies around the world, the United States, despite its high interest rates, is defying expectations of deflation.

Last October, models developed privately by Bloomberg Economics put the probability of a US recession this year at a staggering 100% – complete certainty, in other words.

Even the emerging crisis in the regional lending market, sparked by the failure of Silicon Valley Bank, First Republic Bank, and Signature Bank last spring, failed to make a noticeable impact on growth.

How did so many people get it wrong?

Mohamed El-Erian, chief economic advisor at the German insurance company Allianz and author of the new book Permanent crisis He readily admits that his profession has been all over the place with their expectations over the past 15 months.

Analysts like El-Erian criticize the Fed for blunders that eroded market confidence in its ability to confront economic challenges.

The Fed’s actions, including rapid interest rate hikes and the sale of Treasury holdings, were seen as attempts to cool the overheating economy, but the effect was slow, raising questions about the transition.

One of the biggest mysteries, according to Deutsche Bank, is why this transfer has been “so slow” in the United States compared to other countries.

“The absolute level of market prices is not the best measure of the extent of policy tightening,” concluded George Saravelos, who looks at cross-border money flows as global head of foreign exchange research at Deutsche Bank. “It’s where policy gets through that matters most.”

Ironically, corporate interest expenses actually declined, As returns on their cash holdings have risen while their liabilities are flat, he says.

A prime example of this is Warner Bros. Discovery, whose CFO has bragged that its creditors are hurting so much because of the low interest rates it has maintained for nearly 15 years that it could potentially buy its bonds from them at a deep discount.

30-year fixed-rate mortgages have successfully insulated American homeowners from rapid increases in interest rates, and despite total household liabilities of $17.3 trillion, most Americans still have assets they can liquidate in a pinch.

The latest Federal Reserve report indicates a 37% increase in Americans’ net wealth and emphasizes the country’s economic resilience.

Were it not for recent polls that put Donald Trump ahead in key swing states, one might think that Biden’s economics with its focus on building the middle would have been a landslide success.

The appearance of pockets of weakness

More importantly, the 4.9% pace of growth in the fourth quarter is not sustainable.

For example, Fitch’s Sonola says roughly 1 percentage point of that came from a buildup of inventory that will eventually reverse and become a temporary drag on the economy.

There are also emerging pockets of vulnerability, particularly among these countries Younger and lower-income consumers who rent and have little or no assets.

The growing interest burden on the government, which Bloomberg now estimates at $1 trillion annually, could also lead to cuts in public sector spending in the future.

However, the worst that Sonola expects for next year is a short, shallow recession followed by an immediate recovery that would still mean production would expand year-on-year.

Granted, it will be below trend, somewhere in the region of 1%, but it is still an expansion at a time when China is suffering a real estate collapse and when Germany, Europe’s economic engine, may not grow at all.

The main reason for this is a shortage of about 3 million job vacancies in the United States compared to what was the case before the pandemic.

Even if the Fed’s tightening measures lead to higher unemployment rates, there is still plenty of cushion before consumer spending declines across the board.

This means that as long as two conditions remain in place: 1) high rates of immigration remain a political challenge and 2) baby boomers who fell out of the labor force during the coronavirus do not all want to return.

But Sonola sees this as an unlikely scenario given that many are sitting on a stock of assets on which they can live comfortably.

“The real estate market has been good, their stock portfolio is good, and they are collecting Social Security checks,” Sonola says. “So they have the luxury of playing with their grandchildren and not worrying about money.”

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