Economists expected a recession. They got strong growth instead. Here’s what they didn’t see coming.

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In 2022, Michael Walden guessed there was about a two-in-three chance that the U.S. economy would slip into a recession in the next year or so. 

Now, the Raleigh, N.C.-based economist, like many others, is having to admit he was wrong.

“Clearly, that didn’t happen,” he said.

The U.S. economy grew at a robust 3.3% annual pace in the fourth quarter, well above the 2% expected by economists. That put the overall growth rate at 3.1% for the full year.

The report was “the last nail in that coffin” for anyone expecting an imminent downturn, Walden said, defying earlier recession fears that now seem to have underestimated the economy’s resilience even in the face of sharp interest-rate increases.

But how, exactly, has the economy avoided a slowdown that so many once considered a given? Here are a few factors that experts admit they didn’t see coming.

American consumers just won’t stop spending

The surprising growth of the economy can be traced right back to the seemingly bottomless pocketbook of the American consumer, economists told MarketWatch.  

Households spent the cash reserves they built up during the pandemic. They dipped into their savings, and opted for smaller rainy day funds. They turned to debt, racking up bigger credit-card balances or utilizing buy now, pay later services at record levels during the holiday-shopping season. 

It’s hard to say what, precisely, is driving Americans’ tireless spending streak, economists say.

Maybe the pandemic — and its slew of canceled concerts, delayed vacations and widespread shutdowns — spurred consumers to spend more of their money in the present. Maybe the financial scars of the Great Recession have faded, and households have fewer qualms about going into debt. 

Whatever the reason, the data is clear: Americans are saving less and spending more.

“What we are seeing is that consumers are getting back to their usual ‘spend now, ask questions later’ mode,” said Beth Ann Bovino, chief economist at U.S. Bank. 

There’s an old adage in economics to never bet against the U.S. consumer. It seems that over the last few years, according to Walden, many economists — himself included – failed to heed that warning. 

“That’s how I characterize my mistake,” Walden said. “I underestimated the American consumer, their desire to spend and their willingness to borrow to keep spending.”

The labor market has stayed strong

The labor market has also proven more resilient than expected, economists said, helping to prop up the American spending machine.

Despite high-profile layoffs in the headlines, the unemployment rate stayed below 4% all year long. And new weekly jobless claims are still hovering at remarkably low levels.

In 2023, wage growth also started outpacing inflation after months of aggressive price increases.

“As long as the labor market remains okay, consumers have money to spend. It’s as simple as that,” said Brett Ryan, senior U.S. economist at Deutsche Bank.

Is a recession coming in 2024? 

Just because consumers kept spending through 2023 doesn’t guarantee that will be sustainable through this year, economists said. 

“Eventually though, and I think this year may be a telling year, that will start to run out and households will become a bit more mindful — trading down, searching for value — than they have in the past two years,” Bovino said.

Americans’ carefree accumulation of debt has also raised some alarm among experts. 

Total consumer credit rose $23.7 billion in November, the Federal Reserve said, marking the biggest gain in a year. That put consumers’ total outstanding credit, a measure of how much money people have borrowed, above $5 trillion for the first time ever. 

And the total debt that Americans owe on their credit cards also reached record highs in 2023. 

Does that mean there’s still a chance of a slowdown ahead? 

“I’ve sort of dismissed the idea of an [official] recession,” Walden said. Instead, he’s expecting what he calls a “bumpy” period that stops short of a broader slowdown.

Ryan still anticipates a mild recession in the first half of this year, he said, though “obviously, it’s looking less likely as the year goes on.”

Why has the course of the economy been so tricky to predict? Partially because few economists have seen anything like it, Ryan noted.

“It’s been a weird cycle that has seen a lot of things we’ve never seen before, due to the pandemic,” he said. “It seems like people are still trying to find that new equilibrium.”

Greg Robb contributed reporting.

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