The resilience of the US economy

In 2023, the US economy surprised analysts with a real GDP growth rate of 2.5%, compared to 1.9% in 2022, despite the most aggressive interest rate hikes by the Federal Reserve in the last 40 years. Interest rates rose by 5.25% from March 2022 to July 2023 and experts firmly expected a coming recession. But why didn't the economy collapse?

Reasons for the current economic resilience

Economic resilience can be explained by a combination of different factors. Savings accumulated during the pandemic and increased cash reserves of companies played a decisive role. These funds were increasingly spent by the end of 2023, which supported the economy. Households had reduced their cash holdings, which amounted to 77% of GDP at the end of 2021, to 66% by the end of 2023, showing that these buffers were slowly being depleted.

Source: Federal Reserve Bank of San Francisco

In addition, many consumers and companies had borrowed at lower interest rates, which reduced interest rate pressure. The majority of household debt consisted of fixed-rate mortgages, which are immune to interest rate changes and therefore to higher interest rates.

Source: Morningstar

Despite higher real interest rates, prices for risky assets such as real estate and equities also remained relatively stable, which reduced risk premiums. The following chart shows that spreads have narrowed compared to the real yield on 10-year government bonds - this indicates a general decline in risk premiums.

Source: Morningstar

However, some of the factors mentioned are only temporary and many experts still believe that aggressive interest rate cuts are necessary to avoid a recession in the coming years.

Future challenges and possible developments

Despite the current stability, some indicators are worrying. The debt service ratio in the US, which indicates how much of disposable income is used for interest and repayments, is in line with the long-term average at 15% and is slowly rising. This could change if interest rates remain permanently high.

Source: Fisher Investments

In addition, many private debts will have to be rescheduled at market interest rates over the next five years, especially non-mortgage debts such as credit cards and corporate bonds. This means that average household interest rates could rise, even if mortgage rates remain stable.

The real estate market poses a further risk. If interest rates do not fall, there could be a slow but steady decline in real house prices, especially as the commercial real estate sector is more susceptible to short-term interest rate adjustments and may experience price collapses.

Conclusion and outlook

The Federal Reserve faces the challenge of aggressively lowering interest rates, if necessary, to counteract a recession. The interest rate hikes have so far not caused any profound economic slumps, but the first cracks are beginning to appear. Private debt and the rise in permanent unemployment could signal long-term problems if countermeasures are not taken in time.

The US economy has proven surprisingly resilient, but the future depends heavily on the next moves of the Federal Reserve and the performance of the global economy. Prudent and forward-looking action is crucial to keep the economy on a stable path and avoid deeper crises.

Sources: Morningstar, Federal Reserve of San Francisco, The Macro Compass, Fisher Investments