The United States recorded GDP growth that exceeded expectations, while employment increased and consumers continued to spend despite rising interest rates, thus avoiding a recession in 2023.
While interest rates reached their highest level in more than two decades, a situation usually accompanied by a rise in unemployment rates and a decline in consumption, the situation was different this time.
“talent value”
Low unemployment rates and increased wages and employment played an important role in pushing consumers to spend.
This stems from the disruption businesses experienced during Covid-19 when managers faced difficulties recruiting, training and retaining talent.
Gregory Daco, chief economist at Ernst & Young (EY), said that this made them reluctant to resort to laying off employees even when faced with the possibility of an economic slowdown, and they preferred instead to reduce hiring.
“As a result, we saw greater strength in the employment market,” Daco said in a report by Agence France-Presse.
He noted, “One of the unique aspects of this business cycle is that the value of talent has witnessed a shift.”
Meanwhile, even as the pace of private sector hiring slowed, “noncyclical hiring in government, health care and education contributed the bulk of economic growth,” said Nationwide Chief Economist Cathy Bostiancic.
Purchasing power
Annual real wage growth has been positive since May 2023, ZipRecruiter Chief Economist Julia Pollack reported.
“Lower inflation and increased purchasing power are fueling strong consumer spending,” she said.
Although the number of jobs advertised online has declined steadily after a peak recorded in November 2021, Pollack said the level is still record high.
But she pointed out that the job market is declining, with applications submitted for each job advertisement increasing by 30 percent from year to year in January, based on ZipRecruiter data.
Government spending
Another factor is a series of measures including the $2.2 trillion CARES Act of 2020 and the American Rescue Plan ($1.9 trillion) a year later through which the government passed economic aid to recover from the Covid pandemic.
Dan North, senior economist at Allianz Trading North America, said the payments were certainly “effective in providing inflationary pressures.”
Shortly after, President Joe Biden signed the Bipartisan Infrastructure Act of 2021, authorizing $1.2 trillion in transportation and infrastructure spending, and launched his historic climate action plan: the Inflation Reduction Act of 2022.
While the Federal Reserve has struggled to slow the economy and control inflation by raising interest rates, North said, “fiscal policy has done exactly the opposite.”
“Government subsidies for electric vehicles, microchips, and investments in infrastructure all support business investment at a time when high interest rates would otherwise drag it down,” Pollack noted.
Daco said that about 30 percent of GDP growth last year came from the government sector, which represents about 14 percent of the economy.
Take advantage of the rates
The economy has performed well despite interest rates being raised significantly due to them remaining much lower over previous years.
In 2020, interest rates reached almost zero before the Federal Reserve raised them again in March 2022.
This “allowed companies to make loans at very low interest rates,” which many already did, North said.
“Now, overall, companies are paying the lowest interest payments ever,” he added.
Consumers also benefited from lower mortgage rates, which mitigated the impact of Federal Reserve increases.
Late effect
Economists point out that the impact of raising rates on the economy takes time.
The last rate hike was announced in July and North expects it will take a year and a half for the full impact of a slowdown to appear in the form of a six-quarter slowdown.
However, expectations for this year are still positive, with expectations that rates will be reduced due to the decline in inflation, which usually revives business activity.
A poll conducted by the National Association for Business Economics published this month showed that only a quarter of respondents believe that 2024 will witness a recession.
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