Chief Economist Eugenio J. Alemán discusses current economic conditions.
The strength in consumer demand has been one of the defining characteristics of a very resilient U.S. economy and September’s retail and food services sales report confirmed that the U.S. consumer is alive and well. Recent upward revisions to excess savings accumulated during the COVID-19 pandemic, especially in higher-income households, help partially explain how consumers have kept on consuming. The other partial explanation continues to be the strength of the U.S. labor market, which continues to provide the impetus for the U.S. consumer to remain engaged in the economy even if it requires going further into debt.
One of our arguments for the strength of the U.S. consumer over the last several years has been the improvement in households’ financial conditions as seen by analyzing households’ debt services ratios compared to previous historical periods, especially as the US economy has approached a recessionary environment. That is, the fact that the recovery from the COVID-19 pandemic was not a typical monetary cycle, a cycle characterized by strong borrowing by consumers, is probably at the root of the still strong performance as well as the inability of higher rates to bring the economy to its knees.
What the U.S. economy experienced during and after the COVID-19 pandemic was a typical fiscal cycle, one characterized by large transfers of income from the federal government to individuals and firms. This, together with several decades of very low interest rates, has proved to be an antidote against higher interest rates and has dealt a blow to the ability of the Federal Reserve (Fed) to slow economic activity as well as to the ability of forecasters to correctly gauge the effects of higher interest rates.
Americans are sitting pretty, if not feeling pretty
Although consumer confidence and sentiment in the U.S. has remained low even as the economy has continued to grow and the rate of unemployment has remained close to historic lows – which means that everybody who wants a job has a job – the Fed reported that American’s real net worth, that is, the total value of a person’s assets minus what they owe, or their liabilities, increased by an impressive 37% during the period 2019 and 2022.1 And, just in case, and to be clear, inflation did not contribute to this increase in net worth because this was measured in real terms, that is, adjusting for inflation. According to the report, this was the largest three-year increase in the history of the modern Survey of Consumer Finances.