June 20, 2024

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The cork that floats the US economy is slowly sinking

The cork that floats the US economy is slowly sinking

A soft landing, which is a combination of economic growth that cools sufficiently without recession, while inflation gradually declines to the desired level, is rare.

In recent decades, we have often seen a hard landing, a failed attempt at a soft landing, and talk about a soft landing, with economists disagreeing on whether they will land at all!

According to the International Monetary Fund (IMF), the likelihood of experiencing this extremely rare event has increased recently. In its flagship publication, the World Economic Outlook, the fund says its estimates of economic growth and inflation are largely consistent with a soft landing, particularly in the United States.

The reason for that decision was the significant slowdown of the US economy. It’s growing at about 2 percent, the jobs engine is running smoothly, inflation is slowing and relatively low, and all this against a backdrop of significantly increased capital market interest rates, a central bank interest rate cycle we’ve rarely seen before. , the war in Ukraine and tensions with China.

American consumers can continue to spend

It is mainly consumption by American households that has ensured this impressive performance. Despite 10% inflation, they continued to spend. Granted, wage increases were substantial due to a very strong labor market, but those wage increases were offset by inflation.

The main reason US consumers were able to spend and sustain the economy was because they had a reasonable amount of savings. Lockdowns and pandemics have left a lot of money in bank accounts.

On top of that there was extensive support from the government. As the pandemic ends and normal life resumes, American consumers flock to (online) shopping streets and start spending money.

“As Confidence Returns, Europe May Outperform America, At Least Temporarily”

The only problem with the above reasoning is that in Europe there was forced austerity and government support. However, the US economy has fared significantly better than European economies since the end of the pandemic.

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Why the recovery in the U.S. has been so strong is a question that some economists at the regional central bank in New York have been pondering recently. American households have continued to spend more than they earn since the end of the pandemic. They financed the difference with those accumulated savings.

But when that money ran out, consumption continued to rise. In an analysis, New York Fed economists report that American households are saving less than before the pandemic. European households, on the other hand, are still putting some money aside and haven’t fully spent the savings buffers built up during the pandemic.

They spent money on necessity

Not that the American consumer spent money so eagerly that the future looked bright. Of course not, US consumer confidence is historically low. The abundant flow of money is often associated with the noted high inflation. We know that it always hits the poor and the middle class the hardest.

We also know that this group is larger in the US than in Europe. Many Americans were forced to spend that money. Additionally, the New York Fed points to a possible psychological effect. Americans received their aid in the form of checks mailed to them.

For many, it seemed like they got extra money out of nowhere. Money falling from the sky is easy to spend because you think you don’t have to do anything for it. Psychologically speaking, it is easier to spend that money than the money left over due to the closure of shops due to the lockdown.

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The cork that floats the US economy is slowly sinking
The cork that floats the US economy is slowly sinking

Either way, the difference in how people on opposite sides of the Atlantic have dealt with mandatory cuts and aid explains the better performance of the U.S. economy.

Economists at the New York Federal Reserve attempted to measure this effect and concluded that if American consumers had saved less than before, rather than spent more of their accumulated buffers, household consumption would have been 3 percentage points lower.

Given the weight of consumption in US gross domestic product (GDP), this equates to about 2 percentage points of additional economic growth in the US. For example, let it be the growth percentage for the first half of this year!

In comparison, consumption in Europe grew relatively modestly, holding back economic expansion. Looking ahead, when confidence returns — and it eventually will — Europe could outperform the U.S., at least temporarily, because consumers have more money to spend.

Now that the extra cash has run out, one might even say that the cork that has driven the US economy so far will collapse. I am curious about the performance of the US economy in 2024.

Written by:

Edin Mujakic

Edin Mujakic (1977) is a macroeconomist and Chief Economist since February 2018. OHV Asset management. He specializes in the policies of central banks. Edin is the author of several books in the field of monetarism, such as ‘Intriguing and Fascinating: A Monetary History of the Netherlands since 1814/1816’ (2016) and Money Killing (2012) and is a member of the Monetary Circle. A forum consisting of central bank, finance ministry, economics professors and senior managers from pension funds, banks and other financial institutions.

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