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Humberto Calzada

Chief economist, Rankia, LATAM


 


The U.S. economy is still powerful and far from recession, is this time different?


It seems that the economy of the most powerful country in the world is still resilient. At the beginning of 2023, many analysts, including myself, were not so optimistic about the future of the U.S. economy, since it faced a scenario of restrictive monetary policies where the interest rate reached 5.5% and has remained at that level since the second half of last year. Economists do not envision this strength, if we go back in history and obey economic laws, the tightening of financial conditions has led to recessionary episodes, as what happened in the 70s with Paul Volcker, and in the late 90s after an increase in interest rates, unemployment rates soared; however, at the current moment we have not observed an effect of monetary policy on the economy.


How was the apparent soft landing achieved?


While some analysts were skeptical about the direction of the U.S. economy, economic data suggested that the long-awaited soft landing was being achieved, the reading of these indicators also caused a spread of optimism in the stock markets. The S&P 500 had a very positive 2023 and managed to recover what was lost in 2022, so far, this year has already reached record-level highs, surpassing the five thousand points barrier. The economic optimism also added to the euphoria of a great expectation for artificial intelligence, in my opinion, the next bubble.


However, there are many reasons for the optimism in the economy and the markets because the history of the 70s and the end of the 90s did not repeat itself. The immense amount of liquidity that was injected into the US economy through monetary and fiscal stimuli after the economic shutdown due to Covid-19 continues to maintain the strength in consumption and employment, which are the axes of growth in the United States. But this growth has been fuelled to a great extent by public spending, where the debt continues to be kicked and each time it reaches historic highs.


The U.S. debt problem continues to be a question mark, rating agencies such as Fitch Ratings, which had suggested that the U.S. government should review its spending, have already downgraded its rating. Last year, the issue of the debt ceiling and the struggle between Democrats and Republicans over this issue generated great controversy, although we already knew what the outcome of this soap opera was going to be. The consequences of deficit spending in December was a budget deficit of 139 billion dollars. The debt to GDP ratio continues to increase considerably, at this rate, in ten years the debt will reach 200% of GDP.


It is still uncertain whether at some point the restrictive monetary policies by the Federal Reserve will have an effect on the economy, it seems that the stimulus is still the lifeline, but there are many unanswered questions. The stock markets are singing victory over the soft landing, although we mentioned that each situation is different, there are variables to analyze, but the debt is a worrying issue. We are in an election year, it will be difficult to talk about a fiscal reform, which is the most viable solution to this problem. From our perspective it would have to come from the expenditure side and its reduction, but it will be most likely from the tax aspect with an increase in the tax rate, a painful remedy for consumers and the economy; at this point any measure taken will undermine the economy.


Meanwhile, the stock market continues to be the standard of the economy, where its strength is disguised, a stock market where seven companies are the highlights out of a sample of 500 companies and there is a great expectation in artificial intelligence, the rhetoric of growth continues to be the debt. We will see how far the issue can be dragged, to what extent it is sustainable… it is complex to know. But apparently at this moment the recession has gone away, at least that is the belief, this time it is different, I believe.


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