While a coordinated global interest rate hike has slowed economies worldwide, the U.S. is defying forecasts of a decline despite higher interest rates. Getty Images
Amid a robust U.S. economy, the usual prophets of doom are particularly silent. Michael Burry, known from “Big Short,” and Nouriel “Dr. Doom” Roubini – both typically pessimistic – were conspicuously calm about the troubled forecasts.
With the U.S. economy growing at 4.9%, the bears appear to be entering hibernation early as there are no immediate signs of weakening the pillars of robust employment and healthy household spending.
“It was a total collapse that no one would have predicted three months ago,” Olu Sonola, head of U.S. regional economics at Fitch Ratings, told Fortune. “A tight labor market and a solid consumer balance also mean the economy will be sustained for some time to come.”
While a coordinated global interest rate hike has slowed economies worldwide, the U.S. is defying forecasts of a decline despite higher interest rates.
In particular, last October, models developed by Bloomberg Economics estimated the probability of a recession in the US this year at an incredible 100%, meaning complete certainty.
Even a looming crisis in the regional credit market, triggered by the failures of Silicon Valley Bank, First Republic and Signature Bank last spring, has not noticeably slowed growth.
Why did so many people do something wrong?
Mohammed El-Erian, chief economic adviser at German insurer Allianz and author of the new book Permacrisis, readily admits that his industry has been completely wrong in its forecasts over the last 15 months.
Analysts like El-Erian criticize the Federal Reserve for mistakes that have undermined market confidence in its ability to meet economic challenges.
The Fed’s actions, including rapid rate hikes and sales of Treasury holdings, were seen as attempts to cool an overheating economy, but the impact was slow and led to questions about the transmission process.
One of the biggest mysteries, according to Deutsche Bank, is why this transfer was so “exceedingly slow” in the US compared to other countries.
“The absolute level of market interest rates is not the best indicator of how restrictive policy is,” concluded George Saravelos, who studies cross-border money flows as global head of foreign exchange research at Deutsche Bank. “What matters most is where the policy is implemented.”
Paradoxically, interest expenses for companies have actually fallen, he says, as returns on their cash holdings have increased while their liabilities have been fixed.
A prime example is Warner Bros. Discovery, whose chief financial officer boasted that his creditors had suffered so much from the low interest rates he had secured for nearly 15 years that he could probably buy his bonds back from them at a significant discount.
30-year fixed-rate mortgages have protected American homeowners from rapid interest rate increases, and despite total household debt reaching $17.3 trillion, most Americans still have assets to liquidate in an emergency.
The Fed’s latest report indicating a 37% increase in Americans’ net worth further underscores the country’s economic resilience.
If Donald Trump hadn’t been ahead in recent polls in key swing states, one might think that Bidenomics, with its focus on building the middle, was an overwhelming success.
Vulnerabilities arise
Importantly, the 4.9% growth rate in the last quarter is not sustainable.
For example, about a percentage point of that came from inventory buildup, which will eventually reverse and become a temporary drag on the economy, according to Fitch’s Sonola.
Vulnerabilities are also emerging, particularly among younger consumers and low earners who rent and have little or no assets.
The government’s growing interest burden, which Bloomberg currently estimates at $1 trillion annually, could also constrain future public sector spending.
However, the worst that Sonola expects next year is a short and shallow recession followed by an immediate recovery that will still mean production increases annually.
Admittedly, it will be below trend, somewhere in the region of just under 1%, but still an expansion at a time when China is grappling with a real estate crash and Germany, Europe’s economic powerhouse, may not be growing at all.
An important reason for this is that there are around three million more job openings in the USA than before the pandemic.
Even if the Fed’s tightening measures cause unemployment to creep up, there is still plenty of room before consumer spending is likely to slow across the board.
That is, as long as two conditions remain: 1) higher immigration remains a political challenge and 2) the baby boomers who dropped out of the workforce during COVID do not all want to return.
But Sonola thinks that’s an unlikely scenario since many are sitting on a stockpile of assets they can live comfortably on.
“The real estate market is doing well, their stock portfolio is doing well and they are collecting Social Security checks,” Sonola says. “This gives them the luxury of playing with their grandchildren and not having to worry about money.”
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