Since the outbreak of the COVID-19 pandemic in 2020, the United States has implemented large-scale cash subsidies, various tax reductions, and wage protection plans. Notably, the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 provided USD 1200 per person, the COVID-Related Tax Relief (CRTR) Act in December 2020 allocated USD 600 per person, and the ARP (American Rescue Plan) Act in March 2021 distributed USD 1400 per person. Simultaneously, the Federal Reserve initiated quantitative easing, swiftly lowering interest rates to zero through two emergency operations, maintaining this stance until March 2022.
According to the basic principles of economics, the U.S. should experience significant inflation in the later stages. However, to the perplexity of economists globally, the country is undergoing high growth with low inflation. Recent initial estimates from the U.S. Department of Commerce indicate a 2.5% economic growth for the whole year of 2023, surpassing the 1.9% growth in 2022. Based on FactSet's consensus estimate, economists predict a slight increase in the overall annual inflation rate for 2023, rising from the previous month's 3.1% to 3.2%. Notably, the consumer-level annual inflation has significantly decreased from December 2022's 6.5%.
Meanwhile, the Fed continues to raise interest rates. In 2023, the Fed held its customary eight regular interest rate meetings. Among them, four meetings opted for rate hikes, and four meetings maintained the rates unchanged. According to statistics, starting from March 2022, when this round of interest rate hikes began, by July 2023, it had raised rates 11 times, accumulating an increase of 525 basis points. Although multiple rate hikes have caused the pain of declining economic growth, the Fed deems it necessary and worthwhile, believing it significantly aids in keeping inflation below 2%. How to explain this phenomenon of "high growth, low inflation"?
ANBOUND's founder Kung Chan believes that the key factor is the robustness of the U.S. labor market. It has increased residents' income and consumption, elevated economic growth rates, supported the U.S. dollar exchange rate, made imported goods cheaper, and restrained inflation.
In the context of deglobalization, the U.S. has implemented numerous industrial and technology policies, with many industries and sectors returning to the country, aligning with the "Make America Great Again" (MAGA) trend. Notably, the U.S. government has issued four major acts, including the ARP Act, Infrastructure Investment and Jobs Act (IIJA), CHIPS and Science Act, and Inflation Reduction Act (IRA), providing approximately USD 550 billion in support for industries like chips and new energy vehicles. The total expenditure could reach USD 1.3 trillion in the future.
These technology industry policies have resulted in significant growth in U.S. manufacturing construction spending and real investment. As of September 2023, seasonally adjusted annualized construction spending reached USD 19.965 trillion, a YoY increase of 8.7%, primarily driven by substantial growth in manufacturing spending, contributing 48% to the overall growth. Monthly YoY growth rates have consistently exceeded 60% since the beginning of 2023.
In this situation, while the U.S. labor market is very robust, it still witnesses a decrease due to multiple interest rate hikes, maintaining an overall high level throughout the year. According to data from the U.S. Department of Labor, the total number of new jobs in 2023 was 2.7 million, with an average monthly increase of 225,000, a growth rate higher than before the COVID-19 pandemic. The government, healthcare, leisure, and hospitality industries are the main sectors driving employment growth. In 2023, the government added an average of 56,000 jobs per month, more than twice the average of 23,000 jobs per month in 2022. However, looking at the number of new jobs added for three consecutive months, it had dropped to 165,000 by the end of 2023, reaching a new low since January 2021 and far below the 334,000 at the beginning of 2023.
Additionally, in December 2023, the U.S. labor force participation rate was 62.5%, nearly unchanged from the beginning of the year at 62.4%, maintaining a high level throughout the year, with a 0.8 percentage point gap compared to February 2020. The U.S. unemployment rate increased from 3.4% at the beginning of 2023 to 3.7%, a rise of 0.3 percentage points. However, in a historical context, the unemployment rate still remains within historically low levels. Monthly wages for December also saw a slight increase: the average hourly earnings for non-farm employees in the U.S. rose by 0.4%, reaching USD 34.27. Over the past 12 months, average hourly earnings have grown by 4.1%.
Due to the increase in employment rates and wage growth, American residents' income has significantly risen, supporting the rapid growth of annual consumption, albeit with some fluctuations. According to relevant data, the U.S. consumer spending indicators for the fourth quarter of 2023 mostly declined compared to the previous quarter, with a seasonally adjusted annual rate of 2.8%, showing a decrease from the previous quarter but still surpassing market expectations. Against the backdrop of a lower base in the same period last year, the year-on-year growth rate of consumption reached 2.6%, up by 0.4 percentage points from the previous quarter. In particular, the month-on-month adjusted annual rate for goods fell to 3.8%, benefiting from increased consumer demand during the year-end holiday season, including Black Friday and Christmas, and still maintained positive growth. Meanwhile, the month-on-month adjusted annual rate for services rose to 2.4%, up by 0.2% from the previous quarter, becoming a major driving force for consumption.
The growth in consumer spending has supported a high economic growth rate, subsequently bolstering the U.S. dollar exchange rate, making goods cheaper and suppressing inflation. With expectations of interest rate cuts, American residents' consumption may further increase, continuing to support the economic growth of the country. According to data from the University of Michigan, the U.S. consumer confidence index soared to 78.8 in January 2024, reaching the highest level since July 2021 and experiencing a 29% surge since November 2023, marking the largest two-month increase since 1991, indicating an improvement in consumer sentiment.
Final analysis conclusion:
Currently, the U.S. is experiencing high growth coupled with low inflation, a phenomenon that has left economists worldwide incredulous and perplexed. Despite causing the pain of declining economic growth, the Fed's multiple interest rate hikes have been highly effective in suppressing inflation. More importantly, leveraging geopolitical dynamics and formulating policies in the technology sector, the U.S. has attracted a significant influx of industries and production, leading to a booming labor market. This, in turn, has increased American residents' income and consumption, boosted economic growth rates, supported the U.S. dollar exchange rate, made imported goods cheaper, and further restrained inflation.
