The Resilience of the U.S. Economy: It’s All About Employment, and the Consumer

Chief Economist Eugenio J. Alemán discusses current economic conditions.

As markets and investors are waiting to hear the good news of a potential resolution to the debt ceiling issue, the U.S. economy has continued to plow ahead. The economy has paid little attention to the stress in financial markets created by the recent failure of several regional banks, which seems to have tightened credit markets even further, and to the delayed negotiations regarding the debt ceiling, which continue to cloud the expectations for future economic growth.

So, let’s recap what happened during the COVID-19 pandemic, during which time the economy kept churning due to the large transfers of income from the Federal Government to individuals and firms. That is, during and in the aftermath of the COVID-19 pandemic, much of the growth in economic activity was due to the savings accumulated during the pandemic. Yes, employment was also coming back strongly after the first months of the COVID-19 pandemic, providing an income flow lifeline during that period to those employed as well as those getting hired again, but the excess or accumulated savings helped Americans battle the rise in prices (inflation) that ensued as the economy recovered. An economy with less than full employment but with robust financial conditions by businesses and individuals due to the fiscal policies put forward by the Trump and Biden administrations kept the ball rolling during 2021 as well as 2022 despite the strong increase in prices.

However, as excess savings continue to be depleted, inflation is slowing and employment has remained relatively strong, Americans are depending less on the savings accumulated during the pandemic and are starting to fund their purchases with the growth in real disposable personal incomes. That is, it is now the flow of ‘old-fashioned’ real disposable personal income that is driving economic activity rather than any help from the U.S. Federal Government, which should be good news for markets and for the sustainability of economic growth. However, we are still forecasting a mild recession starting in the third quarter of this year as we expect the increase in the federal funds rate to continue to put downward pressure on economic activity going forward.

Personal Consumption Expenditures