NEW YORK — As some of the world's largest economies slide into recession, the United States continues to power through.
Both Japan and the UK said Thursday their economies are likely to slow in the final three months of 2023. This is the second consecutive quarter for both countries, which fits the standard definition of a recession.
But in the United States, the economy accelerated in the fourth quarter of last year, posting six consecutive quarters of growth. Many predictions last year that a recession was inevitable because of high interest rates meant to slow the economy and inflation were spectacularly refuted.
Give American households a lot of credit for their continued solid spending despite many challenges. Their spending accounts for a large portion of the U.S. economy. Government stimulus helped households weather the early stages of the pandemic and the spike in inflation, and now pay rises are helping them keep up with the high prices of essential goods and services.
Thursday's report showed fewer U.S. workers filed for unemployment benefits last week. This is the latest sign of a particularly strong job market in a recent spate of high-profile layoff announcements. Continued strength there will help support the economy.
Of course, risks remain, and economists say a recession cannot be ruled out. Inflation may accelerate again. Concerns about heavy borrowing by the U.S. government have roiled financial markets and could ultimately make loans to buy cars and other things more expensive. Rising losses related to commercial real estate could be a major blow to the financial system.
But for now, the outlook for the United States remains better than that of many other large economies. The mood on Wall Street is very positive, with the S&P 500 index, the main index of the US stock market, breaking above 5,000 for the first time last week.
“First and foremost, market performance reflects economic prosperity rather than unwarranted 'animal spirits' from investors,” said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management. It is important to emphasize that.”
When the International Monetary Fund upgraded its 2024 global growth forecast a few weeks ago, it cited the stronger-than-expected resilience of the U.S. economy as a key reason.
Analysts say several unique features of the U.S. economy have shielded it from the storm of recession. The U.S. government provided approximately $5 trillion in pandemic aid in 2020-2021, far more than governments overseas, leaving most households in a much better financial position and expected to be in much better financial shape in 2023. supported consumer spending.
The Biden administration also provided further subsidies for building manufacturing plants and infrastructure through supplemental legislation passed in 2021 and 2022, which also had an impact last year. Government spending accounted for about a quarter of the U.S. economy's solid 2.5% growth in 2023. But Republican critics blame the increased spending for contributing to higher inflation.
“There were some policies that we thought were very helpful,'' said Diane Swonk, chief economist at KPMG. “But the structure of our economies is also very different.”
For example, Americans have been better protected from rising interest rates than their British counterparts because most U.S. homeowners take out 30-year fixed-rate mortgages. As a result, the Fed's rapid interest rate hikes over the past two years, which raised mortgage rates from about 3% to about 6.7%, have had little impact on many U.S. homeowners.
However, their UK peers have mortgages that need to be renewed every two to five years. They have suffered from rapidly rising mortgage rates as the Bank of England raised borrowing costs to fight inflation.
Katherine Mann, a member of the Bank of England's rate-setting committee, said on Thursday that the slowdown in the UK economy should be temporary. She added that business surveys were already showing signs that the economy was recovering.
“The data we have today is in the rearview mirror,” he said on the sidelines of an economic conference in Washington. A forward-looking report said “everything is on track.” Like the Fed, the Bank of England is considering lowering its benchmark interest rate once it is confident that inflation is under control.
Another benefit for the United States is that the recent surge in immigration has made it easier for companies to hire and potentially expand, allowing more people to earn wages and spend their income. It means that it has become.
By contrast, Japan's population has been declining for years as it ages rapidly and accepts fewer foreign workers. Population decline can be a strong drag on economic growth.
In Europe, consumer sentiment is sluggish as consumers are still feeling the effects of soaring energy prices caused by the Ukraine war.
Even China, whose economy is growing faster than the United States, is under tremendous pressure. The country's stock market has recently been among the worst in the world due to concerns about a slowing economic recovery and problems in the real estate sector.
The U.S. economy faces unique challenges. That growth is expected to slow this year as the Federal Reserve's big rate hikes trickle through the system.
Thursday's report may confirm that. U.S. retail sales in January fell more than economists had expected in December.
Some of the pillars supporting consumer spending may be weakening. Student loan repayments have resumed, consumers have used up most of their pandemic stimulus money and are carrying high credit card balances.
Perhaps most frustrating is the fact that prices on the market are much higher than before the pandemic. Falling inflation means prices will rise less quickly from here, rather than going back to their previous levels.
A recent study by Morgan Stanley found that dealing with inflation remains a top concern for U.S. consumers, except for those with annual incomes of $150,000 or more.
Speaking about the company's latest quarterly results, McDonald's CEO Chris Kempczinski said he hasn't seen any major changes in the behavior of middle- and high-income customers. But “the people who are under pressure in the U.S. are low-income consumers, and I'd say consumers who make $45,000 or less. Those consumers are under pressure.”
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Lugabar reported from Washington.
