Navigating the Waves: How Robust Consumer Spending is Steering the US Economy Towards a Soft Landing

As inflation in the United States eases, fiscal expansion continues, and the wealth effect from residents' assets supports the economy, consumer spending is expected to remain resilient. This suggests a softer landing for the economy rather than a recession. Here's a breakdown of the factors contributing to this outlook:

Firstly, looking at the income effect, growth in income is a significant driver of consumer spending. Although the year-on-year growth rate of hourly wages in the U.S. has slowed down this year, it remains above the inflation rate. This indicates that real purchasing power is higher than in the years 2021-2022. The stabilization of real income growth provides support for consumer spending. Moreover, in August, the average hourly wage in the U.S. increased by 3.8% year-on-year, which is higher than the 3.6% increase in July.

Secondly, the U.S. fiscal policy remains loose in 2024, which can underpin the economy and support consumer spending. In the short term, on June 19th, the Congressional Budget Office (CBO) raised its deficit forecast for this year, predicting a deficit of $1.9 trillion, which is $400 billion more than the forecast in February. The reasons for the increase include student loan forgiveness and military aid to other countries. After the revision, the projected deficit rate for the U.S. this year will reach 6.7%, significantly higher than the 5.3% predicted in February and the 6.3% deficit rate of the previous year. This clearly shows that the U.S. fiscal policy is still loose enough to support the economy and prevent a recession.

Thirdly, the balance sheets of American households are relatively healthy. After the Federal Reserve lowered interest rates, the appreciation of the stock and real estate markets brought about by the wealth effect will provide long-term support for consumer spending. In October 2023, the Federal Reserve's report on consumer financial conditions showed that between 2019 and 2022, thanks to the rise in housing and stock prices, the actual net worth of American households increased by 37%, reaching the highest level in history. The rise in the U.S. stock market triggered by the AI concept in 2023 further pushed up the net worth of American households. The growth in household net worth brings a strong wealth effect, providing lasting support for consumer spending.