Why the US Economy is Winning in a World of Slow Growth



by FARUK IMAMOVIC

Why the US Economy is Winning in a World of Slow Growth
© Getty Images/Michael M. Santiago

The United States economy has continued to exhibit a robust growth trajectory, much to the surprise of analysts and experts. The final quarter of 2023 witnessed the gross domestic product (GDP) – the most comprehensive indicator of economic output – rise at an annualized rate of 3.3%.

This performance, although a deceleration from the previous quarter's staggering 4.9% growth rate, significantly outstripped the modest 1.5% growth anticipated by economists. This robustness, as famously quipped by Larry David, is "prettay, prettay good", especially in light of predictions a year ago that nearly guaranteed a recession with anemic growth.

US Economic Performance in Global Context

While the US economy's resilience is noteworthy in itself, its significance is magnified when placed in a global context. The United States not only outperformed expectations but also eclipsed the growth rates of other similarly sized advanced economies.

For instance, the collective GDP of the Eurozone, comprising 20 countries, limped along at an annualized rate of just 0.1% in the third quarter of last year. The United Kingdom fared only slightly better, with a growth rate of 0.2%, as per the latest estimates.

Japan's economic scenario appeared even more bleak, with its economy shrinking by 2.1% compared to the same period a year prior. These figures underscore the standout performance of the US economy, which, in comparison, seems to be in a league of its own.

This divergence raises the question: what factors contribute to such distinct economic trajectories? A key element of this disparity can be traced back to the US's aggressive fiscal response to the Covid-19 pandemic. Unlike many of its peers, the United States injected nearly $5 trillion directly into households through various forms of aid, such as stimulus checks and tax credits.

This massive influx of capital, combined with restricted spending opportunities during the pandemic lockdowns, resulted in a significant accumulation of savings. As restrictions lifted, this pent-up financial power translated into robust consumer spending, driving economic growth.

Additionally, the US's unique position as a net exporter of energy played a critical role. While Europe grappled with soaring energy prices, partly due to its heavy reliance on imports and exacerbated by geopolitical tensions, the US benefited from its relative energy independence.

This contrast in energy scenarios has had a profound impact on the respective economies' ability to navigate post-pandemic challenges.

Economic Data Shows U.S.

Economy Grew 3.1 Percent In 2023© Getty Images/Spencer Platt

Driving Forces Behind US Economic Resilience

The resilience of the US economy amidst global economic turbulence can be attributed to a confluence of factors, each playing a pivotal role in sustaining growth.

Central among these is the unwavering strength of consumer spending. Accounting for a substantial portion of the GDP, American consumers have displayed remarkable spending power, undeterred by the highest interest rates seen in over two decades.

The genesis of this spending spree traces back to the aggressive fiscal response to the pandemic. Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, highlights the impact of the nearly $5 trillion stimulus injected directly into households.

This infusion not only bolstered consumer confidence but also provided the financial means for increased expenditure once the economy reopened. Gagnon, who has also worked with the Federal Reserve, notes that this stimulus continues to ripple through the economy, maintaining a high level of consumer activity.

Taxation policies have also played a role in this economic narrative. Reduced tax burdens in recent years have left more disposable income in the hands of consumers. Simultaneously, lower tax revenues have led to increased federal borrowing, adding complexity to the economic landscape.

Energy prices, another critical factor, have diverged significantly between the US and other economies. The US, with its vast energy resources, has been somewhat insulated from the global energy price hikes that have affected many countries, particularly in Europe.

This energy advantage has contributed to the US's relatively lower inflation rates compared to its European counterparts, where economies have struggled under the weight of skyrocketing energy costs. These elements combined paint a picture of an economy buoyed by robust consumer spending, strategic fiscal policies, and a unique energy landscape.

However, the question remains: how sustainable is this growth, and what challenges lie ahead?

Implications and Future Outlook

The remarkable performance of the US economy, especially in the context of global economic trends, raises critical questions about its future trajectory and potential challenges.

Despite the strong showing in 2023, there are signs that the US may not sustain such high growth rates indefinitely. Experts, including Joseph Gagnon from the Peterson Institute, caution against expecting the continuation of the 3.3% GDP growth.

The economic landscape is complex and subject to a variety of influences, ranging from global market dynamics to domestic policy shifts. The key lies in understanding that economic trends are inherently unpredictable, and the US economy, though resilient, is not immune to global pressures and internal shifts.

One of the most immediate concerns is the trajectory of the Federal Reserve's monetary policy. With the economy showing robust signs of growth and inflation rates stabilizing, there's an ongoing debate about the timing and necessity of interest rate adjustments.

The Federal Reserve's decisions in this regard will be instrumental in shaping the economic outlook for 2024 and beyond. A significant factor in this equation is consumer sentiment, which remains strong, bolstered by slowing inflation and a recovering stock market.

This optimism in consumer behavior is a positive sign for continued economic activity, but it also brings into focus the need for sustainable and inclusive growth. As Treasury Secretary Janet Yellen noted, GDP growth must translate into tangible benefits for all segments of the population.

Looking forward, economists and Federal Reserve officials anticipate a slower pace of growth compared to 2023, but not a contraction. The challenge will be to manage inflation without triggering mass job losses, a balancing act often referred to as a 'soft landing'

Lydia Boussour, a senior economist at EY-Parthenon, estimates the odds of a recession at around 35%, suggesting a cautious yet optimistic outlook.

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