The following blog was written by Nancy Lottridge Anderson, Ph.D., CFA
Every time I travel outside the United States, I come back with a sense of gratitude, feeling lucky to have been born in this place at this time. Americans are blessed with opportunities and resources galore. We have reaped the benefits of a system that encourages and rewards innovation and hard work. Across the globe, there exists an “American dream,” an aspirational nirvana that acts as a beacon to world. While other countries build walls to keep their citizens in, here in America, we struggle to keep people out.
Despite our good fortune, the mood of the country is sour. Participation in the blessings of America is not equally disbursed. And our media diet can convince us that we are experiencing the end of an era. The evidence tells a different story.
The October 19th edition of The Economist focuses on America’s economy. The cover reads “The Envy of the World, America’s Economy: A Special Report.” The articles were written and published prior to the election and lay out a case for the strength and resilience of our economy. Much of the following is based on those articles. I take a thirty-year lookback at the American economy dating back to 1990, revealing a longer arc.
I also take a snapshot of our current situation, citing economic data that shows our strength and position now. Most recently, the pandemic knocked us off course, but our recovery has outpaced all other developed economies. I present graphs to display the change in data over the last four years.
Post-election, The Economist weighs the positives and negatives of the new upcoming Trump administration. That article appears in the November 9th edition entitled “Taxes down, walls up.” I review possible outcomes, knowing that talking points on a campaign don’t always turn into policy. There is much to be revealed come January, but big ideas have been floated that could have a profound impact on our economy.
For the near-term, I offer suggestions for navigating an uncertain time. Our politics have become poisonous and threaten to spoil fertile economic ground. How do we navigate the ugliness, personally and corporately, without losing sight of that American dream? How do we maintain objectivity as we assess risks and opportunities for ourselves and our families? Finally, I turn to the longer-term and discuss secular changes that could leapfrog us into a new era. I conclude that, for all the poison swirling round us, America’s future is bright.
In 1990, the US economy represented 2/5 of the world’s economy. Today, it makes up half. Our population ranks third, with China and India each having about four times our number. Despite this, we are the biggest trading market. While we have fewer people, we are wealthier, with household income far outpacing other countries. According to The Economist, “Mississippi may be America’s poorest state, but its hard-working residents earn, on average, more than Brits, Canadians or Germans.” The Economist, October 19th 2024, p. 11.
In the past thirty years, the world has experienced several economic crises: the dot-com bubble of the late 90s, the terrorist attack of 9/11 in 2001, the Great Recession of 2008, and the Covid pandemic of 2020. In each case, the US economy recovered faster than other developed nations and has come through stronger as a result.
What are the unique qualities that allow America to weather economic storms and still maintain an upward mobility for itself and its citizens? I detail eight advantages that allow us to best our allies and neighbors. These eight represent current advantages that have placed the US in the lead economically.
1. Scale – The US, geographically, is a large country. While we started as thirteen separate colonies/countries, we joined together to form a strong federal government that allowed for greater protection and trading positioning. We are now fifty states, each imposing in buying power. California represents the fifth largest economy in the world, while Texas is the eighth largest in the world. Together, these fifty comprise the biggest market globally. State borders are porous, such that products and services easily flow between states. New ideas spread quickly, as companies reach consumers from coast to coast.
2. Labor Market – We have a big, well-integrated labor market. Workers easily change locations in search of jobs. The barriers to relocation are small which is why many rural parts of the country are job deserts. The US has transitioned to a, largely, service economy, so manufacturing’s influence has declined. It has become more difficult for communities to attract jobs. Instead, workers must move to locations that offer better employment.
Immigrants add to our workforce, filling jobs that many Americans no longer want. Construction, hospitality, and landscaping all depend on immigrant workers. This is especially true in wealthy, high-growth states like California, Texas, Florida and Nevada. The Economist says that our porous Southern border has been our “tailwind.” Our tight labor market has not impeded our recent growth because of the flow of undocumented workers who are attracted by the promise of work and money.
Finally, our workers, for the most part, know how to adjust. We recognize changes in demand in the labor market, upgrading our skills to accommodate evolving industries. Information about jobs and earning potential are widely disseminated, allowing our workforce to retool with a changing economy.
3. Financial Markets – Companies can access capital for growth because of our well-organized and easily accessible financial markets. These markets are the centers and engines for growth, so regulation in this area is crucial. Investors world-wide have confidence in a system that is transparent and liquid. Many international companies want access to US financial markets as they seek funds to expand.
4. The Dollar –The dollar is still the global currency, accounting for about 70% of transactions worldwide. Even in situations where no party is American, dollars will still be used because of the stability of our currency and the confidence in our governing system. Other countries have tried to make inroads in the use of their currency, but the dollar remains king in trading. There have also been attempts to use a currency that combines those of several countries or to even use a crypto currency, but we don’t see a change in the dollar’s dominance in the near future.
5. Government Intervention – For all the anti-government talk in the US, it is the government that undergirds much of private business. Government funding of research and development fuels much of the pharmaceutical and technological industries. Some funding is done directly by government entities that is then sold or passed on to private enterprise. In other cases, government grants support research at the university level, the results of which are used in private business. DARPA, the Defense Advanced Research Project Agency, is responsible for the development of the internet.
And when the economy dips into recession, the US government is poised to intervene to push us back into expansion as quickly as possible. Monetary policy is the most-used tool to address declines in business activity, but we also use fiscal policy to help business and citizens weather downturns. Most recently, the pandemic resulted in huge government payments which kept many businesses and families afloat. Note that more government stimulus occurred in the Trump administration than in the Biden administration.
6. Regulations – While we have well-regulated financial markets, there is a general laissez-faire attitude when it comes to business in general. Historically, we have had a relaxed approach to regulation, allowing business to operate with limited constraints.
7. Energy – Despite the concerns about energy independence, the US is now the largest producer of oil and gas. We are not the leader in alternative energy sources but are making progress there, as well.
8. Churn – The US is not stagnant. Losers fall by the wayside quickly. Innovators take the lead. Our business environment encourages and rewards flexibility, both in our companies and in our workers. The only constant is change.
The last recession was in 2020 and was sharp and quick. The cause was a global pandemic, and the impact was felt worldwide. The US recovered quickly. In fact, it was a bit like a rubber band that had been stretched to breaking, then quickly released. The result of the reverberation was high inflation. Once the vibrations settled and the soft landing became a reality, the American economy reverted to an average growth rate of about 2.5%.
The short pandemic recession is marked in the thin gray line. GDP plunged as individuals and businesses shutdown and stayed inside to stay safe. By 2021, economic activity spiked in an “almost” mirror image of the downturn. Note the blue line stayed above zero from 2021 through 2024. Chicken Little cried about the sky falling on a daily basis, but no recession occurred. Currently, our GDP is approximately $23.4 trillion and shows a steady line upward over the last ten years, with the slight detour of the pandemic in 2020.
Unemployment spiked with the pandemic, peaking at 14.70% in 2020. As the pandemic eased, hiring ramped up. Currently, we are experiencing a very tight labor market, with the unemployment rate at 4.10%. Historically, this is quite low. Some economists might call this the frictional unemployment rate, since there are always a certain number of our citizens not working (for many reasons) at any point in time.
The stock market dropped significantly at the beginning of the last recession but bounced back quickly. The S&P 500 is about 5927, which is around 53% higher than the beginning of 2021—a healthy gain in four short years.
The one cloud in this economic picture is inflation.
Since the Financial Crisis of 2008, interest rates have been quite low. Some would argue that rates were kept artificially low for ten years, but this level spurred business growth and consumer spending, as all took advantage of cheap money. Rates were beginning to rise when the pandemic hit. The Federal Reserve lowered rates to the 0% range to spur activity, but their monetary moves had little impact on spending. We all pulled in to stay safe.
Further government intervention occurred when Congress passed stimulus packages to offset business and personal losses. Fiscal policy was used to shore up the economy across two administrations. Six COVID relief bills were passed for a total of $4.6 Trillion. The Biden Administration passed one bill totaling $1.9 Trillion. The remainder came during the first Trump administration.
As economies opened up, prices began to rise sharply.
Inflation, which had remained low for about a decade, suddenly spiked to over 9%. Families suffered sticker shock from one week to the next as groceries, building materials, and other goods rapidly saw price increases. Much of the blame for inflation has been laid at the feet of the amount of stimulus that was pushed out. Families with money in the bank began spending freely once they felt free to resume normal activity. While this certainly was a factor, we now know this was not the full story.
Researchers have studied CPI changes and supply chain issues and found that the majority of the spike in inflation was on the supply side. In fact, in 2020, 79% of price increases was due to supply chain problems.[1] In 2021, this dropped to 60% as some of these problems were resolved. Between shutdowns in manufacturing and logjams in transportation, goods were not flowing freely in 2020 and 2021. By 2024, growth in CPI slowed to 2.60%, but the general public still felt the sting and shock of quickly rising prices in an uncertain world.
Even though hourly wages increased with prices of goods, the feeling of going backwards remained for most. In fact, hourly wages outpaced inflation by about 0.1% during the last four years, but most families still felt they had lost ground.
Despite the earthshattering experience of living through a pandemic, the country recovered. The data show that the American economy is currently thriving, growing at a solid pace with a healthy jobs market and a booming stock market. The Economist says, “An economy with an unemployment rate of 4% and a per person GDP of $85,000 does not have to be made great again: it is great.”—The Economist, October 19th2024, Special Report p. 16.
But we had an election, and a new Trump administration is promising big changes. The impact on the economy is unknown, but we are weighing possible outcomes and the swiftness of any changes even before Inauguration Day. Some proposals could have a positive effect on the economy, while others are decidedly negative. Some changes may occur strictly through executive action while others require Congress. Any Congressional action will be slow and arduous, giving market participants a chance to adjust.
I will start with policy proposals that bode well for the economy. During the first Trump administration, corporate tax rates were lowered to 21%. The stock market soared in response, as companies faced lower expenses which immediately increased bottom lines. This tax decrease was a permanent one, but candidate Harris had proposed increasing this tax. We now know that will not happen.
1. Corporate Taxes – President Trump has suggested lowering the corporate tax even further to 15%. A further reduction would require Congressional action. This move would boost the stock market further, but, like the previous change, could increase our budget deficit. Any increase in business spending would offset some of the deficit increase, but it would not be a one for one.
2. Personal Taxes – The change in personal income tax rates that occurred under the first Trump administration had a sunset provision. These will expire in 2025, and President Trump has vowed to extend the cuts. With both houses of Congress controlled by the Republican Party, this will certainly pass. Lower personal taxes are a plus economically, but there is little evidence that it is matched by increases in spending. The deficit would continue to grow.
3. Regulations – This is where it gets murky. Some regulations require Congress. The Trump Administration is claiming authority to deregulate or not enforce current regulations. Much of this action will be adjudicated, and there is an assertion that the Supreme Court will rule in the administration’s favor. Regardless, reducing regulations is a slow, one-by-one, process.
Regulations create costs for business and slow down economic activity, but there are costs to the society at large with a lack of regulations. Clean water. A safe food supply. Protections for workers. A no-holds barred approach is good for Corporate America but bad for the general public. In the short run, some deregulation will propel the economy, but the real cost to citizens will lag.
In 1929, the Great Depression hit. As a result, several new laws (regulations) were enacted to protect our financial system and prevent a collapse from happening again. One such law was the Glass Steagall Act of 1933. It built “walls” between different types of financial activities to prevent any one large institutional loss from toppling the whole.
The law was in place until 1999 when it was repealed. By then, our memories of The Great Depression were fuzzy, and Corporate America clamored for fewer regulations. Banks wanted to also be in the insurance business. Insurance companies wanted to set up banks. Investment companies wanted to do it all. After 1999, it was “Katie, bar the door.”
There is a straight line between the repeal of The Glass Steagall Act and other “hands off” policies that led to The Financial Crisis of 2008. Deregulation offers an immediate juice to the economy, but the hangover the next day can be brutal.
Also, bear in mind that the US has, historically, taken a light approach to regulation. The new administration is claiming that deregulation will be the driving engine in GDP growth. How does that happen when the effects will be limited, possibly targeted, and definitely slow? I am doubtful. Deregulation will produce a mixed bag.
4. Government Efficiency – We all want government to be more efficient. Any bureaucracy, whether private or public, is cumbersome. Inefficiencies are to be expected, but the new administration is promising (through Elon Musk) to cut the federal budget by $2 Trillion. That’s a third of the total budget. Does he know that two thirds of the budget is made of Social Security, Medicare, Medicaid, Defense and Interest on the Debt?
Some cuts can come from the executive branch. Some will have to go through Congress. While the Republican Party controls both houses of Congress, they also must get elected. Cuts that affect local communities will certainly experience pushback. It’s great to say you want to cut government spending, until it affects you or someone you know.
Will the increase in government efficiency be positive for the economy? If federal workers lose jobs and must now compete in the private market, we could see increases in the unemployment rate. With that comes decreases in consumer spending followed by decreases in business spending… and on and on we go. The Federal Government, through its employees and contractors, contributes 23% to GDP. Yes, lower spending means lower taxes, but cuts will ripple throughout, another mixed bag.
And then there are the negatives, the ones that cause me concern.
1. Tariffs – Trump has already proposed 25% tariffs on Mexico and Canada and an additional 10% on China. The purpose of tariffs may be two-fold: protect American jobs and/or national security. If the reason is for national security, these can be enacted with executive action (Day 1).
George Will says tariffs are like putting a blockade around your own port. They impede trade, and that is bad for the economy. We have used tariffs in varying degrees, and the Biden Administration has certainly placed tariffs strategically as a means to protect domestic manufacturing. Will manufacturers move to US soil to avoid tariffs? Possibly, but manufacturing has changed. More loss of US jobs has occurred because of automation than that caused by movement of plants overseas.
Initially, manufacturing moved to other countries in search of cheaper labor. Cheap labor makes for cheap imported goods. Tariffs are designed to increase the price of imported goods in order to allow US goods to compete. While foreign producers pay the tariff, they offset the increase in expenses by increasing the price of their goods. They pass on the cost of the tariff to the final consumer—us.
We don’t know the final policy of the new administration. Will the talk of tariffs be all bluster for use in negotiation, or will sizable tariffs be placed on all those cheap things we know and love? Tariffs are inflationary, and Americans are already chafing from higher prices. They will serve as a drag on the economy, making their contribution to the national budget questionable.
2. Immigration – Our unemployment rate has remained around 4% for the last few years. This is a tight labor market, and the expectation had been that labor costs would increase as a result. While wages have increased, the change has not been dramatic, and this is because of immigration.
In fact, Federal Reserve Chair Jerome Powell has made several speeches suggesting the US increase legal immigration to address labor shortages. The US birth rate has fallen. We have an aging population. While we can promote policies that support larger families, we need workers now. The answer lies in our immigrant population.
The Economist says our Southern porous border has been our economy’s “tailwind.” A lax border policy and a booming economy attract workers, whether documented or not. The construction industry, hospitality industry, and landscape industry all depend on foreign workers. Pass any job site in Florida or Texas, and all you’ll hear is Spanish. Are all those workers here legally?
Reducing that workforce with deportations and/or stricter border policies will certainly be inflationary. It could even lead to stagnation. Sure, you may try raising wages to attract workers to these industries, but Americans don’t appear anxious to pursue careers in these service jobs. Expanding legal immigration is the only way to keep our economic engine humming, but that would require Congress. Maybe all those fired federal workers can start cleaning hotel rooms in Florida.
3. Federal Reserve – The Federal Reserve was designed to be independent of the branches of government. Powell was appointed under the first Trump Administration but has incurred Trump’s wrath for interest rate policy. Every President wants low interest rates. These drive the economy, but an independent Fed must rely on data to keep our economy on an even keel. There is talk of a “Shadow Fed,” and the specter of a chair who would succumb to Presidential bullying. This would signal to the rest of the world that we are not stable and reliable. It could put the dollar and our Treasury market in peril.
4. Deficits – The largest increase in the deficit occurred under the first Trump Administration. Deficits, in and of themselves, are not a problem. In the short run, a deficit may be used to spur economic growth. Long-term, though, the situation is not sustainable. Eventually, this will lead to “crowding out” in the debt markets, resulting in rising rates. Lowering taxes without a corresponding decrease in spending will juice the economy in the short run but will put the US at risk later on.
Our biggest problem? We have an aging population. According to Dave Wessel, Brookings Institute economist, we are spending too much on our senior citizens and not enough on our future. Between Social Security, Medicare and Medicaid, the aged are taking the lion’s share of tax revenue. Without changes in these programs, future generations will not have access to these benefits.
5. Uncertainty – Markets hate uncertainty. Investors prefer boring and stable. The first Trump Administration was an exercise in constant chaos. This is not good for the economy. Will they have learned from past mistakes? That’s debatable.
Trump likes being an agent of change, but that often translates to an agent of chaos. If the policies he proposes and the actions he takes start to weigh on the economy and on markets, will he adjust? The Economist says, “It is going to be a turbulent economic ride, for America and the world. Buckle up.” – The Economist, November 9th 2024, p. 60.
With all the uncertainty, what are the near-term projections? The push to “juice” the economy should be positive in the short run. Expectations are that 2025 will be good for business and for investors, but the pro-growth policies of the Trump Administration in an economy with little slack will likely result in further inflation. Stepping on the gas of an economy that’s already running fast poses risk.
Also, economies don’t stay in expansion forever. While the decade after the Great Recession produced the longest run of growth, the business cycle waxes and wanes. And the current expansion is a “little long in the tooth.” We are due for a breather/downturn, and the possibility of one in the next 2-4 years is high. The concern is that a push for short-term growth could result in a bubble. Buyer beware!
What should an investor do? Revisit your plan. If you’re dependent on your portfolio for income, make sure you don’t have to sell stocks in a downturn. Keep a sizable portion in fixed income that will provide income, while weathering any market declines. Participate in the growth in 2025 but get prepared by beginning to build cash and near cash in 12-18 months. While the forecast for another recession is 2 years, I think this may become a reality in the next 18 months.
And what about the longer-term prospects for the US economy?
There are exciting innovations which are set to make a sea change in our economic prospects. AI is already disrupting business and changing the way we function in our everyday lives. The multiplier effect on productivity could be profound. Some forecasters have suggested a US GDP in the future of 10% or more. I’m skeptical of these eye-popping numbers but know that AI is a game changer.
Like the industrial revolution or the technological changes of the last few decades, AI stands to propel the US economy and other world economies to the next level. Another special report by The Economist is an introduction to AI’s potential.
And don’t forget our eight advantages. America has led the world for the last thirty years, and we have the resources to continue to do so. But our poisonous politics could erode those advantages. “America is not about to lose its economic dominance. But sooner or later, rotten politics will start to exact a heavy price, and by then it will be hard to reverse course.”-The Economist, October 19th2024, p. 11.
And, “Growth is not an inalienable right, but a gift to be cherished and nurtured. If the virtuous cycle that propels America’s economy forward goes into reverse, toxic politics would by that point be ingrained. There is no knowing how bad a president’s ideas have to be before things start to fall apart. The turning-point may not come tomorrow, or even in the next four years. But with every mistake that politicians make, it draws another step closer.”- The Economist, October 19th 2024, Special Report, p. 11.
And finally, The Economist concludes, after weighing the advantages and the current risks…
“These are the roots of sustained economic outperformance. They look as strong today as at any time over the past three decades, which is good news not only for America, but also for the rest of the world. That America, a liberal democracy, remains a bigger economic power than its authoritarian challengers is an unalloyed positive for a global order under intense strain. For other countries to truly benefit, though, America will need to overcome its protectionist impulses, to return to a position where its wealth helps to lift others and it can lead through inspiring example. Our view is that it has ample economic capacity to do just that, as long as its politics allow. There will, of course be downturns, doubts and drama along the way. But if you want to bet against America, The Economist will gladly take the other side of the wager.”
- The Economist, October 19th 2024, Special Report, p. 16.
[1] Robin Brooks, P. R. O., Meltzer, J. P., & Esther Lee Rosen, E. L. Y. (2024, August 15). Covid-19 inflation was a supply shock. Brookings. https://www.brookings.edu/articles/covid-19-inflation-was-a-supply-shock/
