Rocking the Economy: How US Consumer Spending Is Driving Growth.

Amazingly, the US consumer has continued to be a rock star.  The signs are there for all to see.  Retail sales grew 4.1% year-over year in November, which included important Black Friday data.  Sentiment and optimism are on the rise due to lower interest rates and lower gas prices.  In addition, the “wealth effect” – a result of high and steady real estate values and growing retirement account balance – is contributing to consumer confidence. 

Of course, employment is always a key to consumer behavior.  We are seeing some effects form the Fed’s restrictive policy, but so far it is in a slightly lower number of new job postings and not from layoffs.  Brian Donnelly, Fidelity’s fixed Income strategist, told us last week that his firm sees a steady employment picture in 2024.  Fidelity has a huge retirement business, and their opinion is influenced by speaking directly to the companies they serve.  Interestingly, Fidelity has been in the “soft-landing” camp for the last 18 months according to Donnelly. 

Another argument against a broad recession is the concept of “rolling recessions.”  Why didn’t the US economy fall into recession in 2023 as many had predicted?  In Capital Groups’ outlook piece, they make the case that a recession did happen, just not all at once.  For example, existing home sales tumbled 40% at once point in 2022.  Manufacturing also dipped into contraction territory in the second half of 2022.  If contractions and recoveries like these continue, sort of piecemeal, the US economy could continue to avoid a broader recession.  Capital Groups’ economist Jared Franz thinks the US economy could grow at an annualized rate of 2%.

A third argument for an economic soft-landing rather than recession is the Fed policy pivot.  We now expect interest rate cuts in 2024.  Thequestion is, when and how many?  The stock and bond markets are expecting six cuts this year, starting in March.  We believe that is too aggressive as the central bank is hesitant to “jump the gun” on inflation, and that it will more likely be three starting in May or June.

The Fed has made significant gains on inflation (cutting it by more than half to approximately 3% in 2023).  At this point, it’s a safe bet that the central bank has stopped its interest rate hiking cycle.  In fact, through the Fed’s “dot plot” we can see three cuts indicated by policymakers in 2024.