While a globally coordinated tightening of interest rates has slowed economies around the world, the United States, despite higher interest rates, is defying contraction forecasts. Getty Images
Amid a robust U.S. economy, the usual pessimists remain notably silent. Michael Burry, of “Big Short” fame, and Nouriel “Dr. Doom” Roubini – both typically bearish – have been noticeably silent on the troubled forecast front.
With the U.S. economy growing a strong 4.9%, the bears appear to be hibernating early as there are no immediate signs of weakening the pillars of robust employment and healthy household spending.
“It was a total explosion that no one would have predicted just three months ago,” said Olu Sonola, head of U.S. regional economics at Fitch Ratings. Fortune. “A tight labor market and a strong consumer picture also mean the economy will be supported for some time to come.”
While a globally coordinated tightening of interest rates has slowed economies around the world, the United States, despite higher interest rates, is defying contraction forecasts.
Last October, the models developed by Bloomberg Economics notably estimated the probability of an American recession this year at the staggering figure of 100%, a total certainty in other words.
Even an emerging crisis in the regional lending market, triggered by the failure of Silicon Valley Bank, First Republic and Signature Bank last spring, failed to significantly dent growth.
How come so many people got it wrong?
Mohammed El-Erian, chief economic adviser to German insurer Allianz and author of the new book Permacrise readily admits that his profession has been all over the place with its predictions over the past 15 months.
Analysts like El-Erian criticize the Federal Reserve for mistakes that have eroded market confidence in its ability to address economic challenges.
The Fed’s actions, including rapid rate hikes and selling Treasury holdings, were seen as attempts to cool an overheating economy, but their impact has been slow, prompting questions about the transmission process.
One of the biggest mysteries, according to Deutsche Bank, is why this transmission has been so “extremely slow” in the United States compared to other countries.
“The absolute level of market rates is not the best indicator of how tight monetary policy is,” concluded George Saravelos, who studies cross-border fund flows as global head of foreign exchange research at the Deutsche Bank. “It’s where the policy is transmitted that matters most. »
Paradoxically, corporate interest costs have actually decreased, he says, because their cash returns have increased while their debts are fixed.
A good example is Warner Bros. Discovery, whose chief financial officer boasted that its creditors were suffering so much because of the low rates it locked in for nearly 15 years that it could probably buy back its bonds from them at a significant discount.
30-year fixed-rate mortgages have protected American homeowners from rapid rate increases, and despite total household liabilities of $17.3 trillion, most Americans still have assets that would liquidate in a heartbeat. .
The recent Fed report showing a 37% increase in Americans’ net worth further highlights the country’s economic resilience.
If it weren’t for recent polls putting Donald Trump ahead in key states, one might think that the Bidenomics program, with its emphasis on building a middle ground, has been a resounding success.
Pockets of weakness emerge
It is important to note that the 4.9% growth rate recorded last quarter is not sustainable.
For example, Fitch’s Sonola says about 1 percentage point of that comes from inventory buildup that will eventually reverse and become a temporary drag on the economy.
Pockets of weakness also appear, particularly among younger consumers and low-income earners who are renters and have few or no assets.
The government’s growing interest burden, now estimated by Bloomberg at $1 trillion annualized, could also reduce future public sector spending.
Still, the worst Sonola expects for next year is a brief, superficial recession followed by an immediate rebound that will still mean an increase in production on an annual basis.
Sure, it will be below trend, somewhere in the region, at less than 1%, but it will nonetheless be an expansion at a time when China is struggling with a housing crash and Germany, the economic engine of Europe, might not grow at all.
This is largely due to the lack of approximately 3 million more job vacancies in the United States than before the pandemic.
Even if the Fed’s tightening measures cause unemployment to rise, there is still plenty of room before consumer spending slows across the board.
That is, as long as two conditions remain in place: 1) higher immigration remains a policy challenge and 2) not all baby boomers who left the workforce during COVID want to return.
But Sonola considers this an unlikely scenario given that many have a stock of assets with which to live comfortably.
“The housing market is 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.” »