American consumers were supposed to crumple under the weight of rising interest rates last year. Instead they gave a big lift to the economy and kept it out of recession.
A healthy increase in retail sales in 2023 illuminates the story.
Sales jumped in December to cap off a strong holiday shopping season. For the full year, receipts rose 5.6%, nearly double the rate of inflation and above the historical average.
“2023 will likely go down as the year of the American consumer’s resilience, and today’s consensus-smashing report is a fitting way to end the year,” said economist Ali Jaffery of CIBC Economics.
It wasn’t just how much people spent, either. It was what they spent their money on.
“Most people are working and feel secure in their jobs. So they’ve continued to spend. The unemployment stood at a very low 3.7% at the end of 2023.”
They allotted a large chunk of their discretionary income to wants and not needs.
Americans went out to eat a lot last year, for one thing. Sales in that category climbed 11% in 2023.
They also spent on lot on other services, such as leisure, travel and entertainment.
The same story played out in goods. Sales at Internet retailers like Amazon
AMZN,
for instance, surged almost 10% last year.
Car sales also rebounded. Automobile makers sold more than 15 million vehicles last year following a disappointing annual sales total of 13.9 million in 2022.
The retail report showed automobile-dealer receipts up 10% vs. a 1% increase in prices.
Americans also bought lots of clothes and consumer electronics in 2023.
Strong consumer spending almost certainly kept the U.S. out of a widely predicted recession. Household outlays account for two-thirds of the economy.
“For now at least, consumers appear to remain both willing and able to do their part to keep the economy on a growth trajectory,” noted Jim Baird, chief investment adviser at Plante Moran Financial Advisors.
Few, a year ago, would have predicted this.
Before 2023 started, a majority of economists expected the high interest rates orchestrated by the Federal Reserve to tame inflation to tilt the economy into a recession. And many still think a mild recession is likely.
Not so fast, others say. They point to the strong labor market as a reason that the U.S. might avoid a downturn.
Most people are working and feel secure in their jobs. So they’ve continued to spend. The unemployment stood at a very low 3.7% at the end of 2023.
The slowing rate of inflation, what’s more, allowed incomes to start rising faster than prices for the first time in several years. That gave households a bit more spending power.
The cost of gasoline also fell sharply last year, offering further relief and giving Americans more money to spend.
Can it continue? The jury is still out.
Higher interest rates have curbed business investment and hurt manufacturers. Government spending also can’t continue on its current course. Those are two of the three main pillars of economic growth.
Yet as long as consumers keep spending, companies won’t have much reason to lay off workers and launch the economy on a downward spiral.
Thus the expansion stands a good chance of carrying on.
“I am feeling more confident that the economy can continue along its current trajectory,” Fed Gov. Chris Waller said in a speech on Tuesday.
