Demand for Rockettes tickets was so high that the dance troupe added eight shows to its schedule and extended its Christmas special into the first week of January. More than 1 million customers watched the holiday performance.
Elsewhere, companies like Hilton, Ford and Chipotle benefited as consumers and businesses opened their wallets. Despite the fastest interest rate rise in 40 years, the economy is hotter today than it was when the Fed first raised borrowing costs in March 2022. The 353,000 jobs created last month was the highest monthly total since January 2023.
“Even though the Fed is raising rates, people aren't feeling it,” said Nathan Sheets, global chief economist at Citigroup.
Strong economic growth could ease recession fears and delay the Fed's long-awaited move to cut interest rates.
When the Fed fights inflation, it typically raises interest rates to discourage consumers and businesses from borrowing. A decline in personal and business loans leads to lower demand for all types of goods, slowing the economy and reducing pressure on prices.
That was the thinking when the Fed began raising interest rates two years ago, when U.S. inflation approached levels not seen since the early 1980s. The Fed's benchmark lending rate rose from near zero to its current level of over 5% in less than 18 months.
However, the results were unexpected.
Higher interest rates typically push up the value of the dollar, widening the trade deficit as foreign goods become more affordable while U.S. exports suffer, said Dean Baker, an economist at the Center for Economic Policy Research.
But this time, many other central banks were raising interest rates to fight inflation. Therefore, the dollar's rise was not sustained. And the trade deficit narrowed rather than widened as consumers stopped buying imported goods and started spending more on in-person services like movies and dining out.
The last time the Fed raised interest rates significantly was in the spring of 2004, when economic growth slowed from about 3% to less than 1% two years later.
Today's economy has been able to avoid rising interest rates in part because borrowing costs were at an unprecedented low following the 2008 financial crisis.
After adjusting for inflation, credit was effectively free for most of the period from 2008 to 2022. According to Sheetz, this era of easy money has allowed many consumers and businesses to refinance their debt and lock in ultra-low interest rates.
The New York Fed said last year that in the latest wave of mortgage refinances, 14 million Americans “will benefit from historically low interest rates and enjoy low financing costs for decades to come.” .
Debt service as a percentage of disposable income is no larger than it was when the Fed started raising interest rates, and remains slightly lower than it was on the eve of the pandemic.
Now, due in part to the pandemic, many consumers and businesses are less sensitive to interest rate increases than they were in the past.
For most of the past few years, millions of consumers have had more cash than usual. Stuck at home and aided by government stimulus checks, Americans hoarded money. Excess liquid assets peaked at an estimated $1.5 trillion in early 2022, according to Eric Winograd, director of developed market economic research at AllianceBernstein.
Economists say there were some silver linings to the supply chain congestion that has been a major headache during the pandemic. This is due to prolonged spending on products such as cars.
Americans who couldn't find a car to buy in 2021 or 2022 are finally buying one. And by the time the cars were on dealer lots, many shoppers were willing to pay a higher price. A total of 16.6 million cars were sold in December, compared to just 14 million two years ago.
“Despite this tightening cycle, the economy has outperformed even the most optimistic expectations,” Winograd said. “But we've used up almost all of that excess savings. We don't have that cushion anymore.”
As these temporary factors fade, interest rate increases may eventually start to come to a halt. Minutes from the Fed's December meeting said higher interest rates caused some companies to “reevaluate future projects, contributing to softer business investment and employment.” Small businesses faced a credit crunch.
The percentage of auto loans that are 90 days past due has just surpassed pre-pandemic levels. Delinquent credit card balances are also higher than in 2019, according to the New York Fed.
This complex situation, with an economy that is growing rapidly despite rising interest rates but showing signs of stress, is encouraging the Fed to properly time its first rate cuts, expected as early as May. is putting pressure on.
Federal Reserve Chairman Jerome H. Powell said in late January that rising interest rates were having an impact on the economy, particularly through the housing market. Fed interest rate hikes reduce demand by making credit more expensive. In fact, sales of new homes declined in the second half of last year as 30-year mortgage rates approached 8%.
But Powell acknowledged that other factors outside the Fed's control are also lowering inflation, such as improved supply chain performance and more Americans returning to the workforce.
It has also effectively shielded parts of the economy from the full force of credit tightening. But once companies solve the final problems in their freight operations and available labor stops increasing, these supply-side benefits will fade and the cost of higher rates will become even greater.
“The restrictions are probably going to be more pronounced,” Powell said.
In the housing construction industry, which tends to be sensitive to rising interest rates, Baker said supply chain disruptions also effectively extended some activities and helped strengthen the economy.
New housing starts have fallen by almost 20% from the April 2022 level of 1.8 million. However, the number of homes under construction, which typically declines with construction starts, has remained stable at about 1.7 million. Baker said construction of the homes is taking longer because of delays in getting the necessary materials.
The good news is that as a result of these obstacles, home construction employment remains at its highest level since September 2007.
That may be starting to change.
Homebuilder Pulte Group expects to be able to build new homes by the end of this year at roughly the same speed as before the pandemic. The company told analysts last week that operations were returning to a “predictable schedule” thanks to more reliable deliveries of construction materials.
“We were literally waiting for the material to come out,” said Ryan Marshall, CEO of Pulte Group.
Many economists expected unemployment to rise before inflation was brought under control. Former Treasury Secretary Lawrence Summers said in June 2022 that the unemployment rate would need to reach 6% and remain there for five years before consumer prices would stabilize.
Instead, the unemployment rate has barely changed, from 3.6% when the Fed started raising interest rates to 3.7% now. In each of the past three months, more Americans have found new jobs than in the previous month.
The job market has been supported by a gradual return to pre-pandemic patterns in consumer spending. After splurging on products like furniture, televisions, and clothing, consumers now spend more money on travel, entertainment, and other personal experiences.
Hilton Hotels welcomed a record number of guests last year, adding 24,000 new rooms in the final three months of 2023, the largest quarter ever. The lodging chain's revenue per available room, the standard industry benchmark, increased by almost 13%.
“Demand is very strong,” Christopher J. Nassetta, CEO of Hilton Worldwide, told investors last week. “Consumers, especially our consumers, the median income level is pretty good, in the $140,000 to $150,000 range, and they still have plenty of money and they still have the desire to travel. There is enough.”
Such spending in travel, leisure and hospitality is about three times more labor-intensive than commodity-producing industries, Sheets said. For example, Chipotle's Mexican Grill plans to hire 19,000 new employees for the spring busy season. JPMorgan Chase similarly said it has 3,500 job openings for its retail store network expansion plans.
Spending on in-person services is tightening the labor market, which means higher wages. Inflation-adjusted hourly wages for manufacturing and nonsupervisory employees rose 1% over the past year, according to the Labor Department. These high salaries mean Americans have disposable income to continue spending on trips to New York.
The Rockets' owner, Madison Square Garden Entertainment, told investors it plans to take advantage of strong demand by increasing ticket prices for its upcoming Christmas performance. Tickets for the 2023 show he started at $49.
MSG also reported a “significant double-digit increase” in ticket sales for the music concerts it hosts over the next six months.
Entertainers such as Billy Joel, Nicki Minaj and Justin Timberlake are also scheduled to perform at the garden. Tickets for these performances start at around $200 and can exceed $4,800 for floor seating, according to MSG's website.
“We're really pleased with how this year has played out,” said Ali Daines, senior vice president of investor relations. “This business is clearly growing faster than we originally anticipated.”
