American consumers were supposed to collapse under the weight of rising interest rates last year. Instead, they gave the economy a big boost and kept it out of recession.
A healthy increase in retail sales in 2023 highlights the story.
Sales jumped in December, capping a strong holiday shopping season. Full-year revenues rose 5.6%, nearly double the inflation rate and above the historical average.
“2023 is likely to be a year of US consumer resilience, and today’s consensus-shattering report is a fitting way to end the year,” said economist Ali Jafari of CIBC Economics.
It wasn't just about how much people spent either. This is what they spent their money on.
They allocate a large portion of their discretionary income to wants, not needs.
Americans went out to eat a lot last year, for one thing. Sales rose by 11% in 2023.
They also spent a lot on other services such as entertainment, travel and entertainment.
The same story played out in Merchandise. Sales at online retailers such as Amazon AMZN,
For example, it's up about 10% in the past year.
Car sales also rebounded. Automakers sold more than 15 million vehicles last year after a disappointing 13.9 million vehicles in 2022.
The retail report showed that auto dealer receipts rose by 10% compared to a 1% increase in prices.
Americans also bought a lot of new clothing and consumer electronics in 2023.
Strong consumer spending almost certainly kept the United States out of the widely expected recession. Household expenditures represent two-thirds of the economy.
“For now at least, consumers appear to still be willing and able to do their part to keep the economy on a growth path,” noted Jim Baird, senior investment advisor at Plante Moran Financial Advisors.
A year ago few people would have expected this.
Before the start of 2023, a majority of economists expected that higher interest rates regulated by the Federal Reserve would tame high inflation and push the economy into recession. Many still believe a moderate recession is possible.
Not so fast, others say. They point to a strong labor market as the reason the US may avoid deflation.
Most people work and feel secure in their jobs. So they keep spending. The unemployment rate reached a very low level of 3.7% at the end of 2023.
Moreover, the slowdown in inflation has allowed incomes to start rising faster than prices for the first time in a few years. This gave families more purchasing power.
The cost of gasoline also fell sharply last year, providing more relief and giving Americans more money to spend.
Can it continue? The jury is still out.
High interest rates have curbed business investment and hurt manufacturers. Moreover, wasteful government spending cannot continue on its current path. These are two of the three main pillars of economic growth.
However, as long as consumers keep spending, businesses will have little reason to lay off workers and send the economy into a downward spiral. The expansion has a good chance of continuing.
“I feel more confident that the economy can continue on its current path,” Fed Governor Chris Waller said in a speech on Tuesday.
