What’s behind the surprising vitality of the US economy?

Growth that defies recession forecasts, solid generation of employmentheavy consumption: the American economy continues to surprise despite high interest rates. How is this apparent paradox explained?

“The value of talent”

A low level of unemployment, increased wages and hiring, sustain the consumption frenzy of American families.

During the crisis of coronavirus, companies even had difficulties hiring, training and retaining their talents. Against this background, many firms think twice before laying off staff and prefer to reduce hiring, Gregory Daco, chief economist at EY, explains to AFP.

The consequence: “Greater resilience of the labor market,” highlights the specialist. Also, employers who value their staff more: “A unique facet of this economic cycle is that the value of talent has changed.”

The private sector offers less employment. But the public sector continued with great dynamics and the government, health, and education “drive a good part of the employment growth,” highlights Kathy Bostjancic, chief economist at the insurance company Nationwide.

Purchasing power

Salaries, after rising so much, ended up growing above the inflationwhich moderates little by little.

“A decline in inflation and increased purchasing power fuel strong consumer spending,” summed up Julia Pollak, chief economist of the job posting site ZipRecruiter, to AFP.

The number of job offers published online has decreased regularly since the peak in November 2021, but remains historically high, adds Pollak, who highlights that signs of weakening of the working market They are visible: each available job offer registered 30% more applications in January than in January 2023.

Public spending

First, the public treasury earned US$2.2 trillion to face the covid crisis in March 2020; then US$1.9 billion a year later. Both former President Donald Trump and his successor Joe Biden They used heavy artillery to support the economy in the face of an unprecedented crisis.

These aid packages certainly contributed to “inflationary pressures,” noted Dan North, an economist at Allianz Trade North America.

Biden immediately signed a $1.2 trillion plan for transportation and infrastructure in November 2021, and then his $750 billion climate action plan in August 2022.

Result: when the Federal Reserve (Fed) tried to cool the economy by raising interest rates – a move that by making credit more expensive discourages consumption and investment – “fiscal policy did exactly the opposite,” says North.

“Official subsidies for electric vehicles, microchips and infrastructure stimulate business investments when high interest rates would have, if that had not happened, lowered” investment spending, added Julia Pollak.

About 30% of the increase in GDP last year came from public spending, which represents 14% of the economy, Gregory Daco explained.

Low rates, high rates

High rates did not hurt the economy because interest rates They came from very low levels, close to zero. In March 2020, to face the covid crisis, the Federal Reserve (Fed, central bank) sharply lowered the cost of money and only began to raise its rates two years later.

This context “It allowed companies to issue debt at very low interest rates,” says North. “Companies, as a whole, pay the lowest interest rates ever recorded,” emphasizes.

Families were also able to take advantage of exceptionally low interest rates to mortgage credits before they began to rise again to their current levels, which are peaks in more than 20 years.

Time

Economists say it takes time for the impact of rate increases to be reflected in the real economy.

The last increase in reference interest rates by the Fed took place in July. And it takes about 18 months for the full effect of an increase to kick in and cool the economy, North says.

For this year, meanwhile, the outlook is positive, with rate cuts on the horizon amid moderating inflation.