Perspectives: Economic Resiliency

March, 2024

The U.S. economy continues to outperform expectations. Aggressive interest rate increases by the Federal Reserve to slow the economy and combat a spike in inflation following the pandemic were widely predicted to result in a recession. This had often been the outcome historically when monetary conditions had been tightened in such a manner.

Instead, the economy demonstrated its strength through additional growth and job creation. Simultaneously, the rate of inflation waned substantially, laying the groundwork for an eventual reduction in rates by the Fed and the next cycle of growth for the economy.

There are different ways to measure U.S. economic activity, the most common being Gross Domestic Product (GDP). GDP is the total value of all goods and services produced within the country, a staggering sum amounting to trillions of dollars per year. The rate of growth or decline is closely watched to assess the health of the economy and compare it with other economies around the globe. Numbers are adjusted for inflation to arrive at “real GDP.”

The last recession we experienced was very unusual, as it was precipitated by a pandemic. Major segments of the economy suddenly shut down, resulting in the deepest recession in the post-World War II era as GDP fell by 9%.

Substantial relief and recovery measures quickly enacted by the government also made it the shortest, lasting only two months in 2020 from March through April. Less than one year later, real GDP surpassed its pre-recession peak in the first quarter of 2021. After falling modestly in the first half of 2022, real GDP has grown continuously since then. (Interestingly, Gross Domestic Income (GDI), which is conceptually equivalent to GDP but measures income earned in producing goods and services, did not decline in early 2022 as GDP slid.)

During the brief but steep recession, 22 million jobs were lost. Steady job growth since then resulted in 4.9 million more people employed at year-end 2023 than just prior to the recession. This rebound and incremental growth happened much more quickly than forecast.

These rapid additions to the workforce meant that more consumers had money to spend (in addition to the aid that was doled out during the pandemic). With consumer outlays accounting for about 70% of the U.S. economy, the cycle completes itself as this spending then further supports the overall economy.

The U.S. economy is also one of the strongest globally. Compared with other advanced economies, the U.S. has fared better than most since the pandemic when it comes to inflation, GDP growth and the unemployment rate. For example, as net importers of energy, European nations and the United Kingdom were heavily impacted by the surge in natural gas prices following Russia’s invasion of Ukraine in addition to all the problems everyone faced.

The strength of our economy has been nothing short of astonishing. It has weathered the multiple forces and crises weighing on global growth, including high inflation, steep borrowing costs, military conflicts and geopolitical tensions. While growth is expected to slow, as we have yet to feel the full impact from higher interest rates and consumer spending normalizes, a recession can never be fully ruled out. However, with inflation waning, the Fed likely done raising interest rates and the labor market remaining robust, odds of a recession appear low. GDP grew by 2.5% last year and economists expect it to expand another 2.1% this year (an estimate that has been continually revised higher for the past six months as current growth surprised to the upside). Continued expansion of the economy bodes well for our investments.