US Economy: Superhero.
Like Captain America, the American economy seems to have an indestructible shield. The Fed has raised the federal funds rate aggressively by 525bps since March 2022 with the aim of tightening financial conditions to slow the economy and to raise the unemployment rate with the ultimate aim of bringing down price and wage inflation (Fig. 1 below).
Yet real GDP jumped 4.9% (saar) and rose 2.9% y/y during Q3 (Fig. 2 and Fig. 3 below). Real nonfarm business output, which is used to calculate productivity, soared 5.9% (saar) during Q3 and rose 3.1% y/y! The unemployment rate has remained below 4.0% since February 2022. Yet both consumer price and wage inflation rates have dropped from their 2022 peaks of 9.1% and 5.9% to 3.7% in September and 4.4% in October (Fig. 4 and Fig. 5).
Debbie and I have been discussing the main reasons for the economy’s resilience and disinflationary tendencies since early last year. Here is a brief review and update:
(1) Resilient consumers. Consumer spending has continued to grow despite the tightening of credit conditions (Fig. 6). As a result, employment has continued to grow, boosting the purchasing power of consumers. Payroll employment rose to a record high of 156.9 million during October, up 1.9% y/y (Fig. 7 below). Many of the industries with the largest payrolls are continuing to expand their employment rolls into record-high territory, including construction (8.0 million), educational services (4.0 million), financial activities (9.2 million), health care & social assistance (21.7 million), leisure & hospitality (17.0 million), and professional & business services (23.0 million).
Some of the industries that are expanding their payrolls are doing so because of strong demand for their services by Baby Boomers, most of whom now are seniors. These include financial activities, health care & social services, and leisure & hospitality. Retired Boomers have over $75 trillion in net worth and will be spending much of it as they grow older. Many of their adult children likely anticipate inheriting some of their parents’ net worth, prompting them to save less and spend more of their incomes.
Also keep in mind that unearned personal income (from interest, dividends, rent, and proprietors’ income) rose to an all-time record high of $6.5 trillion (saar) during September (Fig. 8 below).
