Chief Economist at Mazars on why the US economy is accelerating instead of decelerating

Date: 02 Mar 2023

Vicente Luckina Bunn

George Lagarias, Chief Economist at Mazars, comments on why the US economy is accelerating instead of decelerating.

George Lagarias, Chief Economist at Mazars comments: “After two months of dismal retail sales in the US, American consumers unexpectedly returned with a vengeance in January, as retail sales soared by 3% in January. Then, last week, three more numbers were announced. Consumer expenditure, consumer income and, more importantly, core consumer expenditure deflator, which rose 4.7%, while last month’s number was revised up.

The announcement sent stocks down and was the final blow in wiping out all the gains for bond markets since the beginning of the year. Investors began adapting their peak interest rates to 5.5%, up from 5.25%. Considering that the Fed has been leading those forecasts higher and higher (which means the market is biased towards lower rates), we should now assume that even a 6% peak interest rate might not be out of the question, even though we think the Fed will pause at some point.

The larger question is: Why is the US economy accelerating instead of decelerating?

One possible answer may come from the structure of the US housing market. 90% of all US mortgages are fixed. Around 70% are long-term, 30-year mortgages. Consumers then could keep spending. In other words, the Fed might not have a ‘sticky inflation’ problem, but a ‘sticky growth’ problem.

Another possible answer is that monetary conditions just may not be tight enough. Yes, the central bank performed the sharpest rate hike in forty years. But consumers were deleveraged, and residual liquidity was ample. Rates came up, but virtually from zero.

The third answer is plain old irrational exuberance. Consumers who remained disciplined for two months just ‘fell off’ the proverbial ‘wagon’, convincing themselves that the worst is over. As long as people have a home, they can spend.”

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