In response to an inflation rate that exceeded 9%, the Federal Reserve raised interest rates eleven times in 2022 and 2023 leading many investors (including us) to worry that higher rates would tip the economy over into a recession. Well, miraculously, 2024 will turn out to be an excellent year with real GDP up about 2.8%, roughly an 11.5% increase in S&P 500 earnings per share, and a stock market that rose by approximately 24%. Wow!
Consumers represent about 70% of the overall economy and what we all missed was their incredible willingness to spend despite inflation, higher interest rates, and economic uncertainty. Personal consumption expenditures will be up about 5.5% for the year. I find it interesting that this surge in spending is occurring at the same time that individuals have been telling pollsters that the economy is in terrible shape. In any case, one concern is the fact that credit card debt has risen 51% since 2021 suggesting that many individuals are financing their spending with revolving loans. However, as shown below, the real driver of consumer spending is higher income individuals who are taking advantage of the strong stock market and rising home prices. (What is termed the “wealth effect” by economists)
While many factors and a dash of luck were involved, we should also congratulate the Federal Reserve for “sticking the landing.”