Dhe notion that the American economy is outperforming the rest of the world thanks to massive government investments in semiconductors, electric cars, clean energy and infrastructure is fed with new success stories from the White House every day. In reality, the US will scrape past a recession this year if things go well.
However, new economic data suggests that the United States has reason for optimism. According to government figures, last year ended with solid economic growth of 2.1 percent after 5.9 percent in the previous year. After a weak start to 2022, annualized growth was 2.9 percent in the last quarter of the year, after 3.2 percent in the previous quarter.
An important question is how consumption will develop. Consumer spending represents around two-thirds of the American economy, playing a larger role than in most countries. The economists are registering a clear tailwind here.
After inflation had eaten up wage increases for a long period, the picture began to change in the middle of last year. Since then, inflation has fallen slightly while wages have continued to rise. Real wage increases increase the income Americans have available for consumption.
Back to the pre-corona trend
For the past quarter, the statisticians recorded consumption growth of 2.1 percent. Consumption has been doing better for several quarters than economists at the Congressional Budget Office, for example, are predicting. The American economy has thus reached the growth trend line that this institution had mapped out before the outbreak of the pandemic. Investments, on the other hand, are weakening, with fewer houses being built primarily because of higher interest rates.
The real estate sector is traditionally the first to clearly feel the tightening of monetary policy by the Federal Reserve. The central bank had raised interest rates by 4.25 percentage points in 2022 to curb inflation. A tightening of monetary policy always takes effect with a delay of roughly a year.
This means that it is not yet entirely clear how strong the economic dampener as a result of the interest rate hikes will really be. But surveys in industry and the service sector point to a significantly deteriorated mood, even if this is not yet reflected in the hard economic data. Consumption in some product groups, such as furniture, has also recently decreased noticeably.
Confusing signs from the labor market
The situation on the labor market remains confusing and at the same time decisive for whether the USA will slide into a recession. The unemployment rate is historically low at 3.5 percent. New jobless claims, an indicator of crises, increased in December and January, but are still within the normal range. The mass layoffs of the technology companies give the impression that the decline is now inevitable. However, the data so far do not reflect this. Of the roughly six million unemployed in the United States, there are ten million job vacancies. Many employers are still looking for employees.
The wave of layoffs at the Silicon Valley companies could even have the positive effect that other sectors such as the auto industry can compensate for their shortage of skilled workers in the IT sector. This does not indicate any crisis expectations. Other indicators taste more like a recession: Commerzbank Research shows that the number of employees in temporary employment has been falling for almost six months. Companies use temporary workers to manage economic fluctuations. According to Commerzbank economists, a decline like the one currently registered has been a harbinger of a recession.
A slight tailwind comes from the EU and China. There are increasing signs that the EU can avoid a recession and thus continue to order many American goods and services. Economic forecasts for China have been revised upwards since the country undertook the radical shift in pandemic policy. Most economists still expect the US to experience a recession, albeit a mild one – and an odd one: a near-full-employment recession doesn’t seem out of the question.
