On Friday, the federal government reported earnings as it does the first Friday of just about every month, and just like a slew of other data, this one pointed at an economy that keeps humming along. The economy added 353,000 jobs. The unemployment rate was at 3.7%.
To be sure, the restaurant industry lost 2,400 employees. But in general, an economy in which people have jobs is a good thing.
And it belies expectation. Toward the end of 2022, just about every economist was expecting a recession some time in 2023. They were convinced of it. And executives of major chains were predicting one.
Instead, the economy grew at 2.3% last year, according to the U.S. Bureau of Economic Analysis (BEA), including 3.3% in the fourth quarter. Consumer spending, which many felt would push the economy into a recession, kept humming along.
Consumer spending has driven much of that, and here’s why: Disposable personal income increased 4.2% in the fourth quarter, an acceleration from the 2.9% increase in the third quarter, according to the BEA. Consumer confidence hit a two-year high in January. All those numbers are well short of recessionary.
“Boy was I wrong,” McDonald’s CEO Chris Kempczinski told analysts in December. The company predicted a U.S. recession in October 2022.
To be sure, plenty of signs pointed at an economic downturn. The U.S. Federal Reserve, intent on getting inflation in check, raised interest rates aggressively. Such increases typically lead to a recession. “In economists’ defense, an interest rate hiking cycle of that speed and magnitude should have resulted in at least a mild recession, because it always had in the past,” said Bruce Grindy, chief economist for the National Restaurant Association.
We also saw plenty of boogeymen threatening consumer spending. High prices, particularly at restaurants, were frustrating consumers. Student loan repayments were coming due. Consumers were running out of pandemic savings. Consumers were struggling to pay their bills. All that was expected to depress the consumer spending that drives economic activity.
But economists apparently didn’t appreciate how resilient consumers were. “Consumers, armed with excess savings and ample job opportunities, had the confidence and wherewithal to continue their post-pandemic spending spree,” Grindy said. “And employers, emboldened by healthy consumer demand, were able to invest in their businesses and create jobs.”
“This created a virtuous cycle that overwhelmed higher interest rates’ ability to crush the broader economy, as many as expected,” he added.
The Fed’s monetary policy was able to slow inflation, and it did so without tipping the economy into a recession, Grindy said.
He added that the association felt the economy would avoid a recession. “The resilience of consumers and the economy surpassed even our expectations," Grindy said. “Based on the employment reports of the last few months, it looks like the positive momentum could continue into 2024.”
This isn’t to say there aren’t concerns. Lower-income consumers are shifting some spending away from restaurants that look more expensive than ever, which may be a headwind against sales this year. The election also holds the potential for all kinds of uncertainty.
But contrary to predictions from 15 months ago, the economy is far from a recession.