Chief economist update: It's the US consumer, stupid me

Uh-oh, I may have to put the letters "W" and "R" in front of my last name (Ong) cause that's what my last prognosis for the US economy and the Fed's response is turning out to be.

I've been among those pencilling in a recession when the US yield curve inverted around the middle of last year and believed that the Fed would need to cut interest rates by at least another 25 bps, in addition to the ones it announced in July, September and October (that took the fed funds rate from 2.25%-2.5% to 1.5%-1.75%).

That was before US President Donald Trump was impeached (though later cleared) and corona became known as the virus that's currently infecting the world -- instead of the Mexican lager - among others.

This time, I have every reason not to question Fed chair Jerome Powell's view. In his testimony before the US Congress' Financial Services Committee, he reiterated that, although "not on a preset course ... the current stance of monetary policy will likely remain appropriate".

This is because while "business investment and exports were weak, largely reflecting sluggish growth abroad and trade developments ... the fundamentals supporting household spending remain solid".

It's the consumer, stupid me.

I underestimated the US consumer - them who account for around 70% of the US economy - their propensity to spend that's backed up by optimism and wherewithal to do so.

According to Gallup's annual "Mood of the Nation" survey (conducted January): "Nearly six in 10 Americans (59%) now say they are better off financially than they were a year ago, up from 50% last year."

"The current 59% of Americans who say they are better off financially than they were a year ago is essentially tied for the all-time high of 58% in January 1999. That was recorded during the dot-com boom, with conditions similar to the current state of the economy -- a stock market rocketing to then-record highs and unemployment at multidecade lows -- though GDP growth was higher at that time."

It gets better.

"Americans are also expressing peak optimism about their future personal financial situation. About three in four U.S. adults (74%) predict they will be better off financially a year from now, the highest in Gallup's trend since 1977," it shows.

This is hardly surprising given the wealth effect from the rise and rise in the US equity market - the S&P 500 index hit another record high overnight - and the unemployment rate just one tick above the 50-year low of 3.5%, that means more Americans participating in the 401(k) retirement plan, that means greater wealth effect from the rise and rise in the US equity market.

I would happily shop (and even borrow - given low interest rates - to shop) till I drop too were I'm confident I would have a job tomorrow (perhaps, even better paying) and my retirement account is reaping capital gains and dividends.

Never mind the Fed's take on "weak exports", consumer optimism and spending would, in time, drive business investment higher.

Already, Factset reports that the National Federation of Independent Businesses (NFIB) optimism index improved in January 2020 and is "in the top 10% of all reading in the 46-year history of the survey".

Good or bad, a University of Michigan survey of small business owners found that the "cautious optimism" under Obama turned into full-blown optimism under Trump.

Link to something 2fc3JEZe