The U.S. economy continues to show tremendous resilience as it finishes 2023 with strong momentum and a healthy job market. Will it last long?
The rate hike was authentic
For several quarters, the US economy seems to defy the laws of gravity. Investors and analysts expect a sharp slowdown in activity caused by rising credit prices. Indeed, everything led to believe that raising interest rates to levels they have not known for several decades would weigh on consumption and investment. The tightening of monetary policy is very real: the Federal Reserve’s reference rate is between 5.25% and 5.5%. The 30-year fixed rate, a benchmark for the real estate market, is around 6.9%. The interest rate on credit cards exceeds 21%.
Despite this, the US economy grew by 3.3% in the last quarter of 2023 (annualised), and all indicators are green. Household consumption expenditure, public expenditure and investment are all experiencing significant growth rates. To this are added exports to the party. And in the end, the world’s largest economy is moving forward, while others, particularly in Europe, are failing. But its impact has been limited.
Several factors explain this excellent health
First, there is a very tight labour market. The economy has just created nearly 690,000 jobs in the last two months, and at only 3.7% in January, the unemployment rate remains very low. This gives households confidence and boosts wages. At +4.5% year-on-year in January, earnings per hour worked rose faster than inflation, synonymous with increased purchasing power. In addition, 90% of mortgages in the United States have a fixed rate of at least ten years, and 70% have a fixed rate of 30 years.
As we know, rising housing prices have been one of the main factors driving inflation in recent years. However, owners who have a fixed-rate mortgage completed before 2022 or who do not have/any more mortgages were not impacted, while their income continued to rise. These are all elements that contribute to good consumer performance.
Then there is the natural flood of stimuli and other public aid promoted by Joe Biden. Since the debt ceiling has not been readjusted during the last negotiations between Democrats and Republicans, the federal state spends recklessly. Some 3.7 million Americans have benefited from student loan forgiveness, which totals 136 billion USD.
The Inflation Reduction Act has given a considerable boost to the energy sector (renewable but also fossil) and the upgrading of infrastructure, and it has attracted direct investment from around the world to the United States. Batteries, semiconductors, electric vehicles, and new technologies are companies in these sectors determined to take advantage of this unique opportunity to position themselves in the American market. Thanks to them, the United States, long lagging in terms of energy transition, is becoming one of the powers in this sector.
This creates investment, jobs and, ultimately, wealth. Since the entire energy sector benefits, the United States has become the world’s largest producer of hydrocarbons and the second-largest exporter behind Saudi Arabia. In 2010, they exported 15,200 barrels of crude. 2022 they exported more than 1.3 million barrels, and in 2023, they will set a new record. A meteoric rise for this sector, which allows the country to ensure its self-sufficiency in terms of energy, but also to improve somewhat a trade balance long in deficit, thanks in particular to the exports of gas and oil to a Europe that asks for more.
The importance of leadership
This aggressive policy to dominate the technologies necessary for the energy transition is no coincidence. For decades, the United States has established itself as the undisputed leader in information technology, internet and e-commerce. Suppose the American stock exchange is beating record after record while interest rates are so high. In that case, it is, of course, thanks to an economy that holds out, but also because the American giants of the technological sector reign supreme on the planet. Riding on this dominance and the promise of artificial intelligence, the seven magnificent (Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla) have seen their collective capitalisation soar. By attracting investments in the future sectors to the United States, the United States leaves little chance to its rivals, especially European ones. As a result, the wealth gap between the two sides of the Atlantic continues to widen, and that is likely to continue.
Minor weaknesses are becoming more transparent, all the same
Despite these good prospects, there are signs of stress on the US economy, particularly in the amounts spent. Neither the state nor households have the means to keep current spending levels. The Congressional Budget Office is worried about soaring budget deficits. At 3.7% on average over the last 50 years, the budget deficit will be 5.6% in 2024 and 6.1% in a decade. This will result in a public debt that will continue to rise rapidly to reach 116% of GDP in 2034.
The same goes for households. After rising sharply during the pandemic period (11.4% of disposable income in 2021), the savings rate is melting like snow in the sun, to no longer exceed 4.0%. And while the average interest rate on credit cards is 21.5%, revolving credit (straightforward for the consumer to access since often linked to these same cards) increased by 17.7% over one year in November. Sooner or later, Americans (public and private) will have to live within their means, especially if interest rates remain high, increasing debt charges. But it must be admitted that this is not new and has never prevented the country from triumphing.
Inflation resists in the United States
In January, US inflation exceeded expectations at 3.1%. While it was already at 3% in June, it has been eight months since inflationary pressures globally declined in the United States. This is explained by the excellent health of the US economy and, in particular, dynamic household consumption. With full employment and rising wages, the purchasing power of Americans increases, and they consume massively. This supports economic activity but also inflation.
In this context, the US Federal Reserve will not be in a hurry to change its monetary policy. With full employment, a strong economy and an annual price increase that still clearly exceeds the official target of 2%, it is not urgent to reduce the critical rate. On the contrary, prominent American financiers will wait for inflationary pressures to be lowered and eased well before acting, probably in the second half.
Buy US equities at 5%, 10% or 15%, depending on your defensive, balanced or dynamic risk profile. Dollar bonds are also indispensable in any properly diversified portfolio.
Taking advantage of an economy that holds up and the strength of the tech giants, the US stock exchange had a great start to the year. At current valuation levels, it is not cheap, and excessive household and state spending will inevitably weigh on growth sooner or later. Risks, therefore, exist, especially if interest rates remain high for a long time, leading to persistently high debt charges. Nevertheless, given American companies' enormous potential for adaptability and innovation, doing without such a market would be unwise.
So, we have U.S. equities across our diversified portfolios.