During the second half of last year a recession in 2023 for the US seemed inevitable. The economic headwinds were strong and coming from numerous flanks: high inflation eroding wages and the purchasing power of households, disrupted commodity markets with high oil prices, the begin-ning of a monetary policy tightening cycle by the Federal Reserve, and the removal of fiscal sup-port for the economy. The discussions on the outlook then centered on the prospects of a “hard” or a “soft” economic landing, as the consensus growth forecast reached a minimum of 0.30 per-cent in December 2022.
But since late last year the growth outlook has improved. After the minimum of 0.30 percent, growth ex-pectations gradually climbed up to 1.05% in April 2023. The improvement was not driven by any specific event that changed future expectations but by the release of stronger than anticipated activity data, evidence that the underlying economy is still robust.
This process has been well captured by the Citigroup Economic Surprise Index (CESI), which is an appeal-ing and useful tool to understand and summarize how economic data releases have beaten or missed expecta-tions over a period of time. The index for the US incorporates 38 statistical indicators from a variety of key economic areas, including the labour market, real estate, industrial output, the consumer sector, and business surveys. The index is a weighted index, where each weight depends on how much the respective indicator can affect financial markets. Indicators with a higher weight impact financial market more than indicators with lower weights. The index also considers the timeliness of the information. Indicators from the last 90 days have a lower weight than more recent news and information. Values above zero indicate positive accumulat-ed surprises, while negative values imply that data releases have been worse than expected.
The index shows that positive surprises have not been isolated events. It began an upward trajectory in Jan-uary this year, entered positive territory at the beginning of February, and climbed to a new peak in March. The service sector, which accounts for 77 percent of the economy, has been a key source of positive surprises. Business surveys have beaten expectations in the last few months, pointing towards an economy that remains resilient.
In our view, there are three factors that explain the relative US economic resilience shown by stronger than expected data.
First, household balance sheet data show that consumers still have a significant buffer of sav-ings, and are able to tap into these resources to support consumption. In aggregate, households have $18.2 trillion available in deposits. Interestingly, even households at the bottom 60% of the income distribution benefit from high cash levels, as they hold between $3,000 and 12,000 in excess savings.
