The American Economy Stands Tall And Continues To Grow: What Are The Implications - Nationally & Globally
It is worth keeping in mind that the US is a star economic performer right now. The country is managing to achieve the "magic" of a constantly growing economy while also achieving falling inflation and rising interest rates.
It is quite a phenomenon and one that should get more press.
This achievement is, first and foremost, the single biggest reason that the stock market has done well this year.
It may not feel like it day-to-day - or perhaps even week-to-week reading this newsletter! - but it is also poorly understood that the US economy is doing better its strategic rivals and its peers.
As of right now:
China's economy is stalling and its much celebrated re-opening has been a sputtering disappointment.
Other major developed countries like the UK are still experiencing rising not falling inflation.
Some other developed countries like Japan have economy's that are still smaller than their pre-pandemic size.
Others, such as as Canada, are smaller in real terms or once you account for inflation.
The list goes on and on but for the US vs the World, the picture since the pandemic looks something like:
2%+ a year US growth may not be blowing the doors off and there are most certainly problems to tackle but America is doing far better than its rivals and also far better than it's forecast.
Of the two trends, the latter might be more important especially for US stock prices. Constantly positively "surprising" to the upside will help shares steadily rise by always resetting the bars of expectations just a smidge higher.
This week was very representative of this trend.
As usual, there was a host of economic data. Less typically, the US economy not only did well in May but did better than expected with ALL of the individual data points.
The tally goes something like:
May's US durable goods orders grew at 1.7% versus -1.0% expected.
May's new home sales rose by 12.2% (!) versus an expected -1.2% decline. This rise was also higher than the April performance for the same metric.
The Conference Board’s June consumer confidence index jumped to 109.7 from 102.5 in April, versus 104.0 expected.
US initial jobless claims were 239k versus 265k estimated & 265k the prior week. This was also the lowest weekly reading since early May and demonstrates that unemployed American are swiftly finding new work.
Perhaps most interestingly was the eye-opening revision UP in the US' first quarter GDP from 1.3% to 2%. Economists had expected a miserly 1.4%.
It is true that this last data point is backward looking - the first quarter has nothing with whether the economy is growing today - but does show that the US keeps outperforming relatively speaking.
Here is one summary of all this by a famous Wall Street economist and analyst Ed Yardeni:
"The permabears will have to postpone their imminent recession yet again based on today's batch of US economic indicators, which suggests that our "rolling recession" is turning into a "rolling expansion."
Sounds about right.
Once again, the US economy has surprised to the upside and if you are feeling like this seems to be happening a lot then a) you are right and b) we actually keep track of such things.
There are a few such measures but here is the Bloomberg US Economic Surprise Index. This records how frequently individual data points are coming in above expectations:
The best since early 2021 when the US was emerging from the pandemic.
In aggregate what does this all mean?
For one thing, it means that US growth going forward will also be stronger than expected.
Already there are plenty of reports coming out with headlines like the following:
Higher growth adds up!
~2.2% for Q2 might not be 3.2% of the 1990s but it is considerably better than 1.8% which is what Goldman Sachs had expected it to be at the start of the week. It is also much better than the 1.3% we had penciled in for the first quarter until it was revised higher this week.
In summary, the US is far outshining its rivals this year.
Among rich countries, the economy for the US may be growing strongly in the second half of 2023. That alone is notable and worth celebrating.
Longer term, this "rolling economic expansion" really means two things:
A recession will still eventually happen. One always does but it is increasingly looking like that it will not occur in 2023 or even early 2024.
Secondly, the US economy and especially the jobs market has proven much less sensitive to rising interest rates than experts and their models would have predicted.
That means....higher interest rates!
The insensitivity to rates will be analyzed and debated by academics and policymakers for years to come but for now it is worth considering that it really just means we can keep increasing rates, starting in July.
This is good for savers, good for those hurt by inflation and good for the US's reputation, economically and otherwise. It might just be the Independence Day season "vibes" but having "resilient economy" and "able to withstand very swift interest rate increases" will add to American economic power and even perhaps soft power.
In some respects this is already happening. We were running some basic math about the size of different economies for this piece and were stunned at the results.
Little discussed these days but back in 2008, the EU (with the UK) was slightly bigger than the US economy in dollar terms.
Today, the EU (also with the UK) is well over a fifth smaller than the US ($20.2 trillion vs $26.8 trillion) and as the chart above makes clear, falling further and further behind.
These types comparisons are even less pleasant with some other developed nations.
Call us misty-eyed patriots if you must but in a day and age where Russia's idea of a pitch for the future is: "join us in Novorossiya or we bomb your schools" it is great to have a compelling alternative that doesn't involve precision munitions.
Meanwhile, China is doing its level best to create a dystopian techno-authoritarian police state and finding out that not only does that suck but it also leads to a terrible economy. Youth unemployment in China is over 20%+.
Meanwhile, over here, the US economy is finding ways to include many previously excluded or marginalized groups. A strong and reasonably anti-fragile American economy is great news period but when it also has the strongest black employment rate EVER then that is truly something worth celebrating this holiday weekend.
It might not be perfect but it is worth remembering what you have and what is possible in this country.
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