American Consumers Continue to Defy the Fed. Don’t Expect Rate Cut in America Before June 2024.
American consumer behavior can be summed up in two main points.
For once, I'm going to start an article with a question.
On the face of it, it's a simple question, but the answer may seem more complex: Can you tell me who will be America's economic personality of the year 2023?
I'll let you search for a few seconds.
Come on, just a little longer...
I'll give it to you straight, the economic personality of 2023 is the American consumer!
And as we enter 2024, the American consumer still looks set to play a key role in the American economy.
While everyone was anticipating a recession for America in 2023, the American consumer has surprised everyone, first and foremost the Fed. American consumers will have been the engine of American growth, and even the engine of global growth.
In January 2024, American consumers are continuing in the same vein.
Let's take a closer look.
If you liked reading this, feel free to click the ❤️ button on this issue so more people can discover it on Substack 🙏.
As I said, it all starts at the beginning of 2023. All the economists were anticipating a recession in America. There was no shortage of arguments in favor of this scenario: soaring interest rates, a meteoric rise in prices with a huge impact on purchasing power, a real estate market at a standstill, or the end of the post-COVID-19 catch-up effect.
In the end, nothing went as expected, as I told you in my article on the big economic and financial surprises of 2023.
While Jerome Powell's Fed was counting on a slowdown in consumer spending in America, American consumers decided otherwise. American consumers have never stopped consuming. To do so, they squandered the savings accumulated during the COVID-19 pandemic. Then, American consumers exceeded their bank and credit card debt limits.
American consumers continued to consume, choosing to pay more for everything.
At the start of 2024, American consumers seem determined to do the same, defying all the laws of economic gravity.
Global growth can thank American consumers
At a time when China is sinking into crisis and Europe is flirting dangerously with a recession, global growth can thank American consumers.
What's most astonishing here is that confidence indices continue to climb: up 29% in January 2024 compared to November 2023. This is quite simply unprecedented since 1991!
What are the causes of this phenomenon?
The first cause is economic. It's linked to the employment situation in America, or should I say, full employment in America.
Purchasing power, although under pressure from inflation, is resilient because of the growing working population in America, but also because of the rise in wages, and in particular the rise in low wages since the Great Resignation.
We all know that households with the lowest wages consume their rising incomes massively.
The second cause is psychological. Americans are confident. This word seems to have disappeared in Europe, but it continues to spearhead American success, sometimes to the point of excess. It's a vast subject, but a fascinating one to study.
This behavior of American consumers is not without impact on the Fed's decisions
Unable to depress American consumers into slowing down their consumption, the Fed faced an unexpected situation and decided to take its time cutting interest rates.
Indeed, as long as the consumption engine is running at full speed, as it is now, there is no urgent need for the Fed to cut rates. In the eurozone, on the other hand, there is a sense of urgency, and the ECB should logically begin to adjust its monetary policy before the Fed.
Thus, it is more than likely that the Fed will not decide on a rate cut in America before June 2024.
In the meantime, however, it is possible to imagine that employment in America will begin to slow and that consumption will begin to decline in the second quarter of 2024. This would give the Fed every reason to adjust its monetary policy.
In the meantime, we can't help but admire this American machine!
I always keep an eye on the American stock market to figure out what's going on with the largest world economy. The stock market leads the economy, not the way around, because business first adapt, and then the economy grows.
Technical analysis showed that a reversal of the 2022 correction happened in October of that year. Since then, the indexes have gone up a lot. The economy should follow.
This isn't predicting, though - a close look shows that the biggest gains have come from the magnificent seven (you know them all) in the S&P 500. Many smaller companies haven't done so well. And an election is looming this year... 2024 is bound to be an interesting year.