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America’s mini economic miracle may be fleeting

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The writer is chair of Rockefeller International

The American economy is estimated to have grown at a rate of 3 per cent or more this quarter, a pace as blistering as it was unforeseen. Economists had not predicted a recession before last year, but then most began to think a US downturn was inevitable, as a result of interest rate hikes. Instead, we got a mini growth miracle. So what happened? 

Popular explanations include historically big spending by Joe Biden’s administration and America’s unsinkable consumers, encouraged by an oil price bonanza and the AI wave. Put these factors together and they go a long way to explaining the unusually light impact of Federal Reserve tightening so far. 

Last year, everyone was caught up in one story: the central bank’s interest rate hikes. These typically slow the economy and were indeed producing signs — including an inverted yield curve — that have reliably preceded recessions in the past. Tightening began in March last year, and while it normally takes around 18 months to materially cool the economy, the rate rises came so fast that most forecasters figured growth would slow sooner.

That underestimated the unsinkable consumer. Since the last real recession, in 2008, Americans have reduced their debt burden and put their finances on a more solid footing. The share of debt they carry at fixed rates is up to around 90 per cent, from approximately 75 per cent. And tightening has not yet increased their interest payments — although the Fed may not have finished, according to signals last week. The average US mortgage holder is still paying 3.6 per cent, half the going rate on new mortgages.   

Many American consumers were still flush with stimulus cash at the start of this year. Some pandemic programmes remained surprisingly active, including tax credits of up to $20bn a month to help companies retain and insure employees. Early in Covid, the government suspended student loan payments, putting up to $8bn a month in the pockets of the young, and that programme only runs out next month. The big boost, however, came from the relief cheques and other savings Americans had accumulated under lockdown.

At the excess savings peak in late 2020, Americans had built up an extra $2.1tn, but they have spent that rapidly, and less than a third remains. This draining of savings helps explain why the US economy has been growing faster than developed peers. Savings rose sharply over the past few years in many countries, but European and Japanese consumers have been characteristically cautious in spending that cash.

Then, although they hardly needed another shot of confidence, US consumers got one from the oil bonanza. Prices came down, dropping at the petrol pump from a high of $5.50 a gallon in December 2022 to less than $4 through August this year. 

Even more significantly, post-pandemic expenditure by Biden amounts to the most ambitious expansion of government since Franklin Roosevelt. Of the nearly $8tn in new spending since 2021, some $6bn went to the military, entitlement programmes and the president’s “new American industrial policy”, subsidising US companies to compete with China.

Companies are jumping at the subsidies. The computer and electronics industry alone announced $100bn in new construction plans in the second quarter, up tenfold from the same quarter two years earlier; Piper Sandler research suggests nearly half that increase was inspired by Biden-era subsidies. And ground zero of the tech industry excitement is, of course, artificial intelligence.  

Since late 2022, when the launch of ChatGPT stirred up the buzz about generative AI, the US tech sector is up by nearly 40 per cent, and has added more than $2tn to its market cap — making American shareholders feel wealthier. Take entertainment: summer shows by Beyoncé and Taylor Swift sold out at $700 or more a ticket and by one serious estimate, their sales combined with the “Barbenheimer” cinema phenomenon to add about half a point to US growth in the third quarter.  

Americans are looking for the miracle to continue, if a spike in searches for “soft landing” and a plunge in searches for “recessions” are any indication. But a forecasting rule of thumb — the inevitable rarely happens, the unexpected does — is more relevant than ever in a year of surprises. 

Many nations have come to regret massive stimulus campaigns, as the resulting debts weighed on growth. Big spender China was credited with “saving the world” after 2008, but it has seen growth slow since then.

Post-miracle, the US will face similar headwinds. When the stimulus and other temporary boosts wear off, the American economy could settle into a long, slow grind.

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