The most straightforward explanation is that it took a lot longer than almost anyone predicted to get back to normal after the pandemic. Inflation also turned out to be largely caused by supply problems. That’s unusual. Normally, demand is what causes prices to spike. The Federal Reserve then hikes interest rates to kill demand, but this typically brings big job losses and a recession. This round was different because, after the pandemic, it took a long time to fix supply chains. Plus, there was a labor supply problem, as it took a while to get enough people back to work. As supply glitches abated in 2023, inflation subsided around the world.
This isn’t the full story in the United States. Americans kept their spending sprees going all year long. This, too, was a big surprise. Experts had predicted spending would nosedive as people depleted their pandemic savings, and polls showed that Americans were gloomy, rating this economy as “fair” or “poor.” Yet people kept spending as though the economy were booming. JPMorgan ran the numbers and found that Americans are spending more now than they did before the pandemic, even after adjusting for inflation. This isn’t happening elsewhere in the world. In Europe and Japan, for example, consumers are spending the same as they did pre-pandemic.
The massive U.S. government stimulus clearly worked. It boosted savings and kept millions out of poverty during the worst of the pandemic. It also fueled rapid rehiring, which gave people bigger incomes to spend. Other countries had strong fiscal responses as well, but the United States’ was one of the biggest.
Something more was also at play: In recent years, Americans have grown wealthier, and not just the rich. Households across the income spectrum have seen the largest surge in wealth on record. This was driven mainly by a surge in the U.S. stock market (nearly 60 percent of families now have some stock ownership, generally via retirement funds) and a gigantic rise in home values. The vast majority of homeowners locked in mortgage rates under 5 percent, which insulated them from the Federal Reserve’s painful rate hikes. (Most other countries do not lock in a mortgage rate for 30 years, and this leaves their homeowners far more exposed to interest rate hikes.) Meanwhile, U.S. home values soared. People feel wealthier, even if they haven’t actually sold their homes or stocks. When people feel wealthier, they tend to spend more.
It’s the wealth trend that differentiated the United States from the rest of the world and that wasn’t fully understood when experts made their 2023 predictions, according to the JPMorgan analysis by Joseph Lupton and Maia Crook. Of course, many young people now cannot afford to buy their first homes. But 66 percent of Americans already own homes.
While other countries have seen wealth rise, the jump has been especially high in the United States. The wealth effect helps explain why Americans have been comfortable doing so much extra splurging on everything from jewelry to Taylor Swift and Beyoncé tickets.
So who gets the credit for all this? The answer will be debated for years. Congress and President Donald Trump acted swiftly with the initial aid. President Biden enacted an additional $1.9 trillion stimulus in 2021 that kept economic momentum building. The Fed kept rates low in 2020 and 2021, which juiced the housing and stock markets, and then hiked rates swiftly. Corporate leaders made heavy investments that boosted productivity. Workers (especially women) surged back into the workforce, helping alleviate the labor crunch. Then there was the gradual return to normal after the pandemic and the quirks of the U.S. housing market.
All these factors played a role. But the United States got a miracle while most other nations had a “meh” year because the United States had a bigger stimulus and outsize housing gains.
While spending will likely slow in 2024, be careful betting against the U.S. consumer. As for Biden, he deserves more credit than he’s getting.
