Even though there has been a recent string of disappointing macroeconomic data, in reality, many of these developments are signs of the strength of the U.S. economy.カヴァン・チョクシ mentions that upward price pressures are prevalent as consumption remains remarkably strong. As monetary policy needs to exert headwinds for longer to cool the stronger-than-expected economy, interest rate cuts shall be fewer and later.
カヴァン・チョクシ briefly discusses consumers’ financial health and consumption in the United States
Earlier, pessimists rejected the possibility of a soft landing for the United States economy, as they believed that the resilience of the country was dependent on certain luck-based factors, like pandemic-era savings that would eventually run out. However, inflation moderated and growth stayed strong, they had to accept that the economy was far more resilient than they had thought.
The economic pessimism of the last few years has, to a good extent, been rooted in a misreading of the U.S. consumer. Very often they are interpreted to be financially squeezed, burning through their pandemic-era savings, and dealing with the real income cut inflicted on them due to high inflation. As per such a narrative, demand is artificially high and the collapse of the United States economy is delayed, not averted. However, the narrative of the weakened U.S. consumer does not fully add up:
- Real income, which is adjusted for inflation, is historically strong. They, in fact, have started to grow again as nominal wage growth outstrips inflation. This is in contrast to the global financial crisis of 2008, where real incomes fell for years. Real incomes stand higher than at any point since 2007, across the distribution.
- The savings rate of the consumers might seem linked to a high cost of living, yet it is actually connected to robust household wealth. When people feel financially secure, they tend to save less for the future. At the moment, household wealth is notably strong, exceeding disposable income by more than 7.5 times on average. This robustness is not exclusive to the wealthy; it does extend across income levels, with balance sheets generally healthier now compared to 2019.
- The foundation of solid real incomes lies in the labour market. While hiring has slowed down, leading to a moderation in excessive wage increases, job creation continues to be strong even now. Moreover, wage growth now outpaces inflation rates, resulting in sustained real income growth. This positive trend has also contributed to a gradual increase in consumer confidence from previously low levels.
- Even though several households would have definitely struggled with the consequences of higher prices, there is not much evidence of systemic stress, as consumer bankruptcies have remained contained. Moreover, even if household loan delinquencies are up from record lows, today their rate is no higher than it was in 2018 and 2019.
カヴァン・チョクシ says that it is not just the financial health of the consumers that is misunderstood frequently. At the moment, around two-thirds of consumption remains either above or below its pre-pandemic trajectory, causing significant distortions in various sectors due to post-pandemic fluctuations. This situation has created winners and losers among businesses as they navigate these disruptions. However, it aligns with robust overall consumption, which has surged by over $1.5 trillion in real terms compared to 2019 levels.