U.S. has skirted a recession, but watch for big shifts in trade and immigration policies, economist advises

Economist Elliot Eisenberg makes a yearly trek to provide the Denver Metro Association of Realtors with a forecast. On Thursday he provided a mea culpa to his audience for telling them last January to prepare for a recession that never came.

“I was wrong,” he said, noting that U.S. consumers have proven “remarkably resilient” and that he is optimistic the country can pull off something rarely seen — a sharp hike in interest rates without a downturn, also known as a “soft landing.”

He and other recession forecasters expected consumers would run out of spending steam as their pandemic savings cushion, which hit $2.1 trillion in August 2021, dwindled. That money did run out around March. But consumers, who account for about 69% of economic activity in the U.S., didn’t skip a beat.

The federal government initially underreported personal incomes, which caused forecasts to be more dire than they would have otherwise been, Eisenberg said. More important, perhaps, was a 50% increase in household net worth over the past five years because of surging home and stock prices. When people feel good about their financial position, they tend to spend more, he said.

Renters without investment portfolios didn’t see those wealth gains and lower-income households are under more financial stress. That is showing up in big jumps in credit card and auto loan delinquencies, which Eisenberg interpreted last year as a sign of trouble ahead.

But he now sees the rise in auto loan defaults as a strategic move by borrowers who overpaid for vehicles that shot up in price during pandemic shortages. In the housing crash of the mid-2000s, people defaulted on mortgages when home value could no longer cover the amount borrowed.

This cycle, they are letting go of inflated vehicles, which some borrowers obtained because federal stimulus had temporarily boosted their credit scores.

What comes next for the U.S. economy will likely be heavily influenced by the priorities that President-elect Donald Trump and his administration have set out, he said.

Easing rules on domestic oil and gas drilling will help cap future price increases, but it won’t necessarily spur enough new production to lower current prices, Eisenberg said. That’s because oil in the $70 a barrel range doesn’t create enough of an incentive for U.S. producers to accelerate drilling.

Another priority of the Trump administration is deregulation, which should give the economy a boost over time. But the key phrase is over time. Eisenberg said it will take several years to implement changes, and for firms to readjust and ramp up activity. The benefits are real, but in the future.

Extending the Tax Cuts and Jobs Act, which will expire at the end of this year, is another top priority for the incoming administration. But federal deficits are much fatter than they were in 2017 when the cuts first passed and Republican majorities in Congress are now much thinner. If deficit hawks in the party balk, it won’t take much to derail an extension, which could dampen consumer spending next year.