Ever since the US Federal Reserve (FED) began raising interest rates three years ago, a recession seemed inevitable. The economic backdrop was in favor of this: the fastest and strongest interest rate hikes in over 40 years and an ongoing war in Ukraine, which caused energy prices to rise worldwide. Many analysts, myself included, expected that this combination of interest rate hikes and geopolitical tensions would lead to an economic downturn.
Why the recession failed to materialize
In the fall of 2021, I was still expecting an impending recession that could be triggered by a liquidity shortage, interest rate hikes and quantitative tightening. However, a different picture emerged at the beginning of 2022: liquidity remained high, mainly thanks to the Bank of Japan’s expansionary monetary policy and the US government’s comprehensive fiscal packages. These not only stimulated economic growth, but also ensured that the stock markets continued to rise.
Under these conditions, there could be no recession in the USA. And the signs remain positive.
Interest rate cuts as the next step
In September 2024, the Fed surprised with an interest rate cut of 0.5 percentage points. Although the improved economic outlook and solid labor market figures are dampening expectations of large, rapid interest rate cuts, moderate interest rate cuts are still appropriate in view of the current inflation figures of below 3%. I expect that US interest rates could fall to 3.5% in the short term next year.
Demographic change boosts consumption
A key factor in why the USA has escaped a recession is demographic change. The baby boomer generation is increasingly retiring and bringing with them huge capital investments in real estate, shares, bonds and savings deposits, which amount to around 74,000 billion US dollars. These capital reserves offer financial security that is independent of the labor market.
While young people are traditionally more dependent on their earned income and consume less in times of economic uncertainty, many baby boomers have secured their assets and continue to contribute to consumption. As a result, consumer demand remains high, even if the savings rate falls. It is this generation that is keeping consumption stable in the USA, as they are not continuing to save, but are spending more.
Outlook: Positive signals for the economy
The American consumer therefore remains robust, particularly thanks to the baby boomers. At the same time, falling interest rates will help ensure that real estate prices remain stable or even continue to rise, while the stock markets could also develop further upside potential. In the medium term, the capital markets are not expected to collapse, which means that consumption will remain a mainstay of the US economy.
In short, economic conditions in the US remain favorable. Neither interest rate hikes nor geopolitical tensions have been able to bring the US economy to its knees and it looks as if the strength of consumption will continue in the future. Interest rate cuts will provide an additional boost and ensure that the economic recovery continues to gather pace.
