June 10, 2024

While the U.S. economy is slowing in some respects, in many ways it’s still in growth mode. Why is that? There are two main reasons:

  1. Lower interest rate sensitivity
  2. Strong demand tailwinds

On the first point, recent Census Bureau data shows nearly 40% of homeowners don’t have a mortgage. Plus, most mortgages are 30-year fixed loans, meaning they’re not sensitive to the Federal Reserve raising interest rates.

Additionally, much of corporate America rolled over out debt during the COVID pandemic at low levels. That makes businesses less sensitive to interest rate fluctuations too.

As for demand tailwinds, they’re strong in both cyclical and structural senses.

The government printed about $6 trillion of stimulus during COVID. Then under President Biden, infrastructure investment incentives grew. The CHIPS Act, Inflation Reduction Act, and the Infrastructure Act all continue to provide a strong tailwind to growth.

Also consider how excess savings have started to rise again for higher income households, and immigration has been unusually strong, which supports overall employment growth. The Fed turned dovish in December 2023, which eased financial conditions significantly and boosted consumer spending. Higher interest rates give more cash to households owning fixed income assets.

For years people received minimal interest on their savings balances. Now they’re getting 5%, which is money to spend.

Lastly, after low interest rates from 2008-22, the demand for higher all-in yields remains strong for insurance companies, pension funds, and retail investors. It’s contributed to easy financial conditions and has been offsetting Fed rate hikes.

So, the economy is strong because consumers and businesses locked in low interest rates during the pandemic, making the economy less sensitive overall to higher interest rates. Also, strong demand stemming from excess savings, immigration, and easy financial conditions is keeping spending up.

With this backdrop, it is not surprising that inflation and labor costs remain high. And it will probably continue for at least a couple more quarters.