Executive Summary:
The US economy has performed remarkably well this decade to date despite multiple unusual challenges that would have felled a less resilient economy. Widespread recession expectations failed to pan out repeatedly. The pattern continues, with today’s recession alarmists likewise bound to be wrong for reasons that Dr Ed explains. … Also: A look under the hood of recent GDP data. Capital spending has been robust, with more than 50% of the capital spending in nominal GDP reflecting booming investments in technology. Consumer spending is strong despite flattening disposable income, reflecting spending that’s not reliant on income—i.e., by well-heeled retired Baby Boomers.... Check out the accompanying chart collection.
US Economy I: Still Shock Resistant
The last significant recession in the US lasted 18 months, from its December 2007 peak to its June 2009 trough. This so-called Great Recession was triggered by the subprime mortgage crisis and the subsequent global financial collapse. It was the longest and deepest downturn since the Great Depression. The Covid-19 recession lasted just two months, from its February 2020 peak to its April 2020 trough. This was the shortest recession in US history, caused by the sudden government-imposed economic shutdown during the onset of the pandemic.
Since then, the economy has experienced the most widely anticipated recession that never happened. These fears were triggered by the pandemic, social distancing requirements, supply-chain disruptions, soaring inflation, Russia’s invasion of Ukraine, the tightening of monetary policy, a mini-banking crisis, tougher immigration and deportation policies, Trump’s Tariff Turmoil, a federal government shutdown, and a challenging labor market for job seekers—all challenges with the potential to have clobbered a less resilient economy.
The labor market is starting to show more signs of life. During January, payroll and household employment rose 130,000 and 528,000, respectively. This relatively strong performance was foreshadowed by declining weekly initial and continuing unemployment claims, which remain low, suggesting that February’s employment report might also be surprisingly strong. The unemployment rate fell back down to 4.3% last month and probably remained this low in February.
The newest concern triggering recession fretting is that real personal disposable income has been flat for several months. Consumer spending growth has been bolstered by a falling saving rate. The nattering nabobs of negativity are warning that this isn’t sustainable, implying that consumers will be forced to...
Get answers from MM AI.
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Which recent economic challenges failed to trigger a US recession?
💡Recent economic challenges that failed to trigger a US recession include the pandemic, social distancing requirements, supply-chain disruptions, soaring inflation, Russia’s invasion of Ukraine, monetary policy tightening, a mini-banking crisis, tougher immigration policies, Trump’s Tariff Turmoil, a federal government shutdown, and a challenging labor market for job seekers. These formidable obstacles, despite their potential, were overcome by the economy's resilience.
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What is the current status of the US labor market?
💡The US labor market is showing more signs of life, with January seeing payroll employment rise by 130,000 and household employment by 528,000. This strength is supported by declining weekly initial and continuing unemployment claims, which remain low, suggesting continued robustness in February. The unemployment rate also fell to 4.3% last month, indicating a tightening job market.
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Why is consumer spending strong despite flat real personal disposable income?
💡Consumer spending remains strong despite flat real personal disposable income due to the increasing retirement of well-heeled Baby Boomers who draw on their retirement nest eggs and investment income rather than labor income. This demographic shift allows them to maintain spending levels even as their traditional income sources decline, leading to a falling saving rate as they have less need to save.
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How do Baby Boomer retirements influence current US disposable income and saving rates?
💡Baby Boomer retirements significantly influence current US disposable income and saving rates by depressing both. Once retired and no longer earning taxable wages, Boomers rely on their substantial retirement nest eggs and investment income for spending, which is not classified as disposable labor income. This behavior results in a falling saving rate, as they continue to spend without needing to save from current earnings.
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What are the concerns regarding distress in the private debt market?
💡Concerns regarding distress in the private debt market stem from the falling prices of ETFs that invest in private debt over the past year. This situation raises a legitimate concern that a freeze-up in this market could lead to a credit crunch for borrowers, potentially impacting broader economic stability, although the overall risk to the financial system is not yet deemed critical.
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How might the Federal Reserve intervene if the private debt market freezes?
💡If the private debt market were to freeze, the Federal Reserve would likely intervene swiftly by providing an emergency credit facility to avert an economy-wide credit crunch. The Fed has extensive experience with such interventions, having done so during the Great Financial Crisis, the Great Virus Crisis, and the Mini-Banking Crisis of March 2023, demonstrating a readiness to stabilize financial markets.
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What is the role of Baby Boomer household net worth in sustaining consumption?
💡The $88.5 trillion in household net worth of the retiring Baby Boomer generation serves as a massive source of purchasing power, sustaining consumption even as real disposable personal income remains flat. This wealth allows Baby Boomers to continue spending from their retirement nest eggs and investments, preventing a retrenchment in consumer expenditures.
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