The trumpets of Revelation continue to sound loudly in many analytical houses, but the American economy not only continues to slide deeper into recession, but continues to show signs of strength. More than two years after undertaking a historic increase in rates which took them in a short time from 0% to 5%, the engine of the world’s largest economy, which is its consumer (remember, more than two thirds of the product gross domestic), continues to fuel and the search for explanations is increasing among economists. In the middle of this didactic exercise and a bitter debate between recession yes or recession no (the famous metaphor of soft landing or hard landing), from a house of analysis, they stated their own theory, comparing the American economy to the curious case of Benjamin Bouton.
“In the 2008 film The curious case of Benjamin Buttonbased on the novel of the same name by the American writer Francis Scott Key Fitzgerald (also author of The Great Gatsby), the character played by Brad Pitt he ages in reverse, going from old man to child. Oddly enough, I think something similar is happening in the U.S. economy,” Jared Franz, an economist at Capital Group, said recently.
Instead of following the typical four-phase economic cycle (beginning, middle, end, and recession) seen since the end of World War II, the U.S. economy appears to be going through of a final phase of the cyclecharacterized by tightening monetary policy and increasing cost pressures, to an intermediaryin which corporate profits tend to peak, credit demand increases and monetary policy is generally neutral, the analyst explains.
“The next phase should be recessionbut, in my opinion, we have managed to avoid this part of the economic cycle and turn back the clock to a more favorable situation. How did this happen? Well, it’s a mystery, just like in the movie. But I think Benjamin Button’s economy is the result of dysfunctions occurring in the labor market America after the pandemic, which highlighted conditions typical of the final phase of the cycle. But other economic indicators, more reliable in my opinion, indicate that we are in an intermediate phase,” explains Franz.
The strategist refers to official employment figures and other statistics from state public agencies, which in recent months confirm a certain deterioration that many see as a prelude to recession, but others see it as a simple normalization after a global pandemic that turned everything upside down.
Instead of using the usual unemployment figures to determine the phases of the economic cycle, at Capital Group they analyze the unemployment gapwhich is the difference between the real unemployment rate (currently at 4.1%) and the natural rate, also known as the unemployment rate without accelerating inflation or NAIRUfor its acronym in English. The latter is generally around 5 to 6%. Simply put, this is the level of unemployment below which inflation is expected to rise.
Although it is a summary measure of the business cycle to date, it is based on a broader approach that also analyzes monetary policy, cost pressures, corporate profit margins, investment spending and general economic production, Franz asserts. The reason this indicator works so well, he argues, is that the different stages of the unemployment gap tend to be correlated with the underlying factors of each cycle. For example, when there is a labor shortage, cost pressures tend to be high, corporate profits fall, and the economy is typically at the end of the cycle.
This approach worked well before the pandemic, since in 2019 it warned of the vulnerability of the economy due to a final phase of the economic cycle, which was followed by a brief recession due to covid between February and April 2020. After covid, the impact suffered after the global economy was virtually paralyzed and suddenly reactivated, has meant that the mechanisms that had been used to analyze the labor market and unemployment are no longer as useful for assessing the most difficult economic conditions. more general, because they present a lesser correlation with the classic economic situation. dynamics of the economic cycle, explains the analyst.
“If we do not recognize these changes, it is possible that we assess the cycle too optimistically or, on the contrary, excessively pessimistic,” says Franz, referring to what official labor market data reflects. For the Capital Group expert, if it is true that the United States is in the intermediate phase of the American economic cycle, it could be heading towards towards a period of expansion which could last several years and which would not lead to a recession before 2028.
A similar view is shared by Torten Slock, chief economist at Apollo, who points out that the idea that the labor market is cooling is inconsistent with the continued strength demonstrated by above-trend GDP growth data (2, 8% annualized in the third quarter). ), THE retail sales strengthTHE resistance of durable goodsTHE low unemployment benefit claims and the increase in average hourly wage.
Furthermore, he adds, the crime rates continue to fallcorporate profits are at record levels, weekly forward profit margins are at record highs, and U.S. household balance sheets are in excellent shape (personal spending growth in the third quarter was up 3.7% annualized).
Slock has no doubt that the U.S. economy remains “incredibly strong” and has more growth to come: “In combination with the tailwinds for growth resulting from record stock prices, narrow lines of creditthe rebound of the markets mergers and acquisitions/emissions, the increase in AI/data centers, flea lawTHE Inflation Reduction ActTHE Infrastructure ActTHE tax reduction for national manufacturers and probable deregulationThe bottom line is that we could see a dramatic increase in employment growth in November, including a reversal of the effects of weather and strikes that put downward pressure on nonfarm payrolls in October. Atlanta Fed GDP (real-time measurement, yes). you will) for the fourth quarter is 2.3% annualized, above the Congressional Bureau’s 2% estimate for long-term growth.
The Apollo economist recalls how, when the Fed began raising interest rates in March 2022, many central bank speeches and market conversations focused on the long and variable timelines of monetary policy, c That is, how long it takes before Fed hikes start to happen. slow down the economy. Academic theory suggests that This should take between 12 and 18 months But before tighter monetary policy began to slow the economy, “they spent 30 months since the Fed started raising rates interest, and we haven’t seen any signs of slowing yet,” says Slock. Successive GDP numbers, for example, have irrevocably exceeded growth projections released quarterly by Fed officials.
Why does GDP growth remain above potential and why have the Federal Reserve’s hikes not dampened consumer and investment spending as the textbooks predicted? Slock certifies that the American economy has been less sensitive to interest rate increases because consumers and businesses have clung to low interest rates during the pandemic. While many households have signed low fixed rate mortgages which gives them a notable advantage over those that have recently established themselves, large companies have obtained affordable financing at a fixed rate, which translates into positive net interest payments (the difference between what they pay for interest on their issued debt and what they receive for having the money on deposit).
In addition to the aforementioned structural boost that AI gives, the economist mentions the generous fiscal policywith a budget deficit of 6%, driven by the investment laws cited above and defense spending. “These combined tailwinds offset the slightly negative impact of Fed rate hikes on highly leveraged consumers and businesses. Additionally, these tailwinds are unique to the United States, which is why the business cycle is strong in the United States and weak in the rest of the world “Now that the Federal Reserve has reduced its rates and these three favorable factors persist, the outlook for the American economy remains positive,” notes the expert.
More prosaic and less “pretty” is the explanation given by Alfonso Peccatiello, formerly of ING, in one of his latest reports. The analyst begins his presentation by highlighting two more than revealing data. On the one hand, since mid-2020, U.S. nominal GDP has increased by about seven trillion dollars. At the same time, The total debt of the United States increased by approximately 8.5 trillion of dollars.
“Should we be worried about this debt-fueled growth model? Look: our monetary system focuses on debt/credit creation to support economic growth. There is nothing inherently wrong with this, but the key is to use the new debt to finance investments and productive reforms”, underlines the strategist, who recalls with exclamations the situation that is being created: “For each new dollar of debt, we end up creating far less than a new dollar of GDP growth!”
“The US economy has been doing incredibly well since 2020, but More than organic growth, it’s again growth fueled by debt” concludes Peccatiello, for whom the electoral victory of Donald Trump implies the same thing that that of the Democrats with Kamala Harris would have meant: ” You can be sure that there will be more and more creation of debt to try to fuel the American economic growth. “
Another authoritative and persistent voice on the issue is that of Albert Edwards, a veteran strategist at Société Générale who continually warns against American “fiscal dysentery”. “One of the main reasons the U.S. economy continues to look robust is the massive spending spree just before the election, which added an unusually high 0.7% to year-over-year GDP growth last year. Likewise, the growth of GDP and public employment of 2.75 The percentage is the highest since 1980”, he underlines in one of his last comments, deploring that “the governments of the “The whole world is spending as if their lives depended on it and the United States is on the front line. His final metaphorical warning is a real blow to growth advocates: “The (liner) SS America sails at full speed towards the fiscal rocks“.
