The economy is remaining strong – high consumer spending, wages, and employment fill in the holes

[Nick, 6/7/2024, Wall Street Journal, “Why the Recession Still Isn’t Here”, , Accessed 7/14/24, GDI JK]

Staying strong

The labor force has expanded dramatically in the past two years, following a sharp downturn at the onset of the pandemic. The downturn also coincided with an unusual rise in asset prices such as stocks and homes.

Fed officials are set to hold interest rates steady at their two-day meeting next week. They raised their benchmark rate last year to a range between 5.25% and 5.5%, the highest since 2001. Central banks in Canada and Europe began cutting rates this past week, but growth has been stronger in the U.S.

The Fed is trying to balance the risk of cutting too soon and allowing stubborn inflation to persist with the hazard of keeping rates too high and triggering a slowdown that may not be needed to finish their inflation fight.

Battle-hardened consumers

The extremely unusual nature of the pandemic-induced economic downturn four years ago and the aggressive policy response that followed lie at the root of any explanation for the American economy’s remarkable resilience to date.

By the time the Fed started raising rates, private-sector balance sheets were abnormally strong. Many households and businesses had recently locked in ultralow borrowing costs after the Fed pushed rates down in 2020 and 2021, shielding them from the ensuing hikes.

Typically in the recovery from a downturn, households are more cautious about spending and are likely to save. When rates are low, borrowing supports spending. High rates choke off that spending. This time, economic activity has been supported more by wealth and incomes than by credit. The pandemic altered spending habits which, together with higher asset prices, solid job prospects and government stimulus, left more households feeling flush.

Nothing illustrates the pandemic-era weirdness quite like the U.S. housing market. Higher rates have not only hit demand, they have also blunted supply. Many homeowners with no mortgage or a low interest rate are unwilling to move. The average 30-year mortgage rate has hovered near 7% recently, up from 3% this time three years ago, according to Freddie Mac.

But the average interest rate on outstanding U.S. mortgages in April stood at 4.1%, little changed from 3.9% three years earlier, according to loan-level data from Intercontinental Exchange.

Homebuilders benefited from very low listings in the resale market. But inventories of new homes have ticked up in recent months to their highest level in more than a decade, a sign of possible weakness. Higher interest rates also mean it’s more expensive for builders to carry that inventory.

The spring buying season has been a disappointment even though customers who do walk through the door are more committed to getting a deal done, said Kelman. “Last year, at the first sign of higher rates, people ran for the hills, so it seems like the consumer is more battle hardened now,” he said. Still, the market is “very slow. The number of people buying homes right now is about as low as it can go.”

In surveys, consumers say they’re less confident than before the pandemic, but their big spending habits suggest otherwise. The ratio of household net worth to income was higher in each of the last three years than any time prior to the pandemic.

“People felt more confident, enough that out of every marginal dollar of income and net wealth that they accumulated, they are spending more,” said Ed Al-Hussainy, an interest-rate strategist at Columbia Threadneedle. The opposite occurred in China, the world’s second largest economy, which has faced much slower growth.

When Fed hikes threatened to snuff out hiring in the rate-sensitive housing and manufacturing sectors, new government spending on infrastructure and factories for computer chips and car batteries took up the baton.

Last year, the economy enjoyed an unusual, additional assist from immigration that further boosted employment, supported spending and eased wage pressures.