Less than a year ago, many pessimists rejected the possibility of a soft landing for the U.S. economy. They argued that U.S. resilience was a confluence of lucky factors, such as pandemic-era savings that would eventually run out. As inflation moderated and growth remained remarkably strong, they grudgingly had to accept that the economy is far more resilient than they had thought.

A recent string of disappointing macroeconomic data has given pessimists new resolve. After three months of hot inflation data, the otherwise smooth path of disinflation looks stalled. Expectations for interest rate cuts, as many six at the start of the year, have shrunk to perhaps just one. And equity markets are off recent record highs.

In reality, these developments are signs of strength, not weakness. Each is the consequence of a booming, not faltering, economy. Upward price pressures remain because consumption remains remarkably strong. Interest rate cuts will be fewer and later because monetary policy needs to exert headwinds for longer to cool the stronger-than-expected economy. Equity market volatility reflects these changes but have stayed near record levels, and with rich valuations that reflecting firms’ strong earnings prospects.

Nor is a weaker first-quarter GDP indicative of faltering growth, as it was driven by negative contribution from inventory investment and net exports — both noisy components that do not speak to the strength of underlying domestic demand. Consumption, investment, and housing all contributed positively to the first quarter growth.

Consumers remain strong — and misunderstood.

The economic pessimism of the last few years has often been rooted in a misreading of the U.S. consumer. Too often, they are cast as financially squeezed, burning through their pandemic-era savings, and reeling from the real income cut that inflation has inflicted on them. In this telling, demand is artificially high, and its collapse has been delayed, not averted.

But the narrative of the enfeebled U.S. consumer doesn’t add up:

• Real (i.e., adjusted for inflation) incomes are historically strong and have begun to grow again as nominal wage growth outstrips inflation. Unlike after the global financial crisis of 2008, when real incomes fell for years, they have recently been growing broadly. Across the distribution, real incomes stand higher than at any point since 2007.
• Consumers’ very low savings rate may appear to be driven by a cost-of-living crisis. But lower savings rates are empirically associated with strong household wealth as consumers are less concerned with saving for the future when their finances are strong. Today household wealth is exceptionally healthy — more than 7.5 times disposable income on average. While averages are skewed by the top, balance sheet strength is not limited to the wealthy. Across the income distribution balance sheets are in better shape than they were in 2019.
• Strong real incomes are underpinned by a remarkable labor market. Though hiring has eased, allowing unsustainable wage growth to cool, job growth remains robust. More importantly, the rate of wage growth is now higher than the rate of inflation, delivering continued real income growth. This has also spurred consumer sentiment to start to rise from very low levels.
• While many households have struggled with the consequences of higher prices, there is little evidence of systemic stress, as consumer bankruptcies remain contained. Even as household loan delinquencies are up from record lows, today their rate is no higher than it was in 2018 and 2019.

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