United States, the buoyant economy of discontent

The United States economy is doing very well.

Or very bad.

Depending on how you look at it and, above all, who looks at it.

The resistance of growth, the strength of the labor market, the strength of consumption, the attraction of investments, the increase in productivity and the historical highs of the Stock Market have defied all expectations.

The persistence of inflation, high interest rates, runaway deficits and growing public debt weigh on the other side of the scale.

In an election year, the perception of citizens is also paradoxical: the majority consider their situation good, but that of the country bad.

“I have been hearing every month that there is going to be a recession next month,” said the president of the United States, Joe Biden, in the middle of last year.

“I don't think there is,” he added.

Biden was right where many economists were wrong.

The Federal Reserve's own technicians predicted a recession that never came.

Instead, the US economy grew 2.5% last year, compared to 0.5% in the euro zone, and has entered cruising speed into 2024, almost immune until now from rate hikes. most aggressive interest rates since the 1980s to confront inflation that was also the highest in four decades.

Historical precedents played against the soft landing thesis, a term taken from the space race.

Just as the

Odysseus

module recently tripped over some rocks and fell on its side when landing on the Moon, economists assumed that the economy would stumble as interest rates rose and enter a recession.

Only once, in 1994, with Alan Greenspan at the head of the Federal Reserve, had that outcome been avoided.

The president of the central bank, Jerome Powell, warned that it would be necessary to cause harm to families and companies to control inflation.

The economy, however, has continued to grow and create jobs at a very good pace while prices were contained.

In his recent State of the Union address, the president of the United States declared victory: “The landing is and will be soft.”

Powell, however, does not.

In the approach to price stability, the last mile is still missing, the move from an inflation of 3.2% like the current one to the target of 2%.

There is a risk both that the economy will run out of fuel and that prices will continue to fly.

Even so, economists draw the desired scenario in their forecasts.

In their update this week, members of the Federal Reserve's Federal Open Market Committee expect inflation to be 2.4% at the end of the year and the economy to grow 2.1%.

The International Monetary Fund has raised the growth forecasts for the United States for this year by 0.6 points, to 2.1%, compared to 0.9% for the euro zone and Japan and 0.6% for the United Kingdom. .

The United States is not only the largest economy that is growing the most, but also the only one that has recovered the trend interrupted by the pandemic.

“Imagine that you had fallen asleep at the end of 2019 and woke up at the beginning of 2024. You have been in a coma,” said Justin Wolfers, an economics professor at the University of Michigan, at a recent event in Washington organized by the Brookings Institution.

“The first thing you do is ask about the economic statistics.

Well, I would.

And you would discover that GDP is, in fact, higher than you expected when you fell asleep.

And then you would say to the caretaker of your coma: 'My God, what positive things have happened to the economy while I was sleeping?'

And you would be stunned to learn, in fact, that you had slept through a pandemic and a global recession.

And despite those things we are where we are,” he added.

Maybe Wolfers would have a fit going shopping after his coma, but the truth is that there is a certain consensus that the economy has been much better than expected.

“The recovery in the United States has been spectacular and the unemployment rate has dropped really sharply,” said Jason Furman, former director of the White House National Economic Council under President Barack Obama and professor at the University of Harvard.

“It has taken months or a year or two to achieve what took a decade in the financial crisis.

Now we have what looks like a soft landing.

I think that is nothing short of miraculous,” he argued.

'Bidenomics'

When it comes to distributing merits, a good part corresponds to the Federal Reserve, but President Biden has also shown his chest for his share.

His economic policy continued with the injection of liquidity to families and companies that his predecessor, Donald Trump, had already started.

To this he added a policy of stimulating investments (in microprocessors, with the CHIPS law; in public works of roads, bridges, railways, airports and others, with the Infrastructure law, and in green energy, with the Law of Reduction of Inflation), support for unions (he even participated in a picket line in the Michigan motor strike), promotion of competition (with antitrust cases, opposition to large mergers and measures to lower the prices of pharmaceutical companies and abusive commissions from companies, among others) and economic protectionism (evident in their aid, but also in the opposition to the purchase of US Steel by Nippon Steel).

The media began to call that cocktail

Bidenomics

and he ended up adopting the label.

“They call it

Bidenomics.

"I don't know what the hell that is, but it's working," the president said at a rally in Philadelphia on June 17 of last year when using the expression for the first time.

The president has displayed that label frequently in recent months.

However, American for Prosperity (AFP), the powerful and influential conservative network founded by the billionaire Koch brothers, beat him to the punch and took over the Bidenomics.com domain.

From that website, AFP, which unsuccessfully supported Nikki Haley in the Republican primaries, makes an amendment to Biden's entire economic policy, pointing mainly to inflation, deficit, debt and high interest rates.

They are real problems.

Prices have risen nearly 20% during Biden's term and have frequently taken a toll on basic necessities, such as food and gasoline (which was abnormally cheap due to the pandemic).

Furthermore, the country has entered a spiral of deficit and debt that originated in the Great Recession, was aggravated by the pandemic and has not been resolved afterwards.

The effective public deficit doubled last year due to the drop in income, to the equivalent of 7.5% of the gross domestic product (GDP), despite the fact that the economy was going through a phase of growth and job creation.

Gross public debt stood at 121% of GDP, although that figure is misleading.

There is about seven trillion of intragovernmental debt, so the relevant data is the debt in the hands of investors.

That figure stood at 98% and, according to the projections of the Congressional Budget Office, an independent organization, it threatens to exceed the historical maximum before the end of the decade: 106% of the GDP of 1946, after the effort that the Second World War.

It was at a healthy 35% in 2007, before the financial crisis.

Interest rates, meanwhile, have risen from a level close to zero to 5.25%-5.5%.

This has a full impact on the cost of new mortgages, making access to housing difficult, and making consumer financing more expensive, where delinquencies are skyrocketing.

These rate increases, however, have not prevented the unemployment rate from remaining below 4% for 25 consecutive months, the longest period in more than half a century.

Since Biden took office, 15 million jobs have been created, a historical record, although partly marked by the recovery from the pandemic.

The labor market shows some signs of relative cooling, but it continues to be vigorous and absorbing the arrival of immigrants naturally.

Endurance

Economists have been searching for explanations for the US economy's unexpected resistance to interest rate hikes, international conflicts, banking turmoil, strikes and other setbacks.

Consumption has been the main driver of the economy on the demand side.

The fiscal stimuli of the pandemic and lower spending due to health restrictions left Americans with a full piggy bank.

Federal Reserve economists put excess savings at a high of $2.3 trillion in the third quarter of 2021. They estimated there would still be $1.7 trillion in mid-2022. More recent studies disagree on whether that stockpile will has exhausted or how much remains of it, but it has undoubtedly been a support for the economy, fueling what has been called the revenge of consumption, a phenomenon studied by psychologists.

Although it has made it difficult to access home ownership, the rise in rates has not made much of a dent in those who already had a mortgage, since in the United States long-term loans at a fixed rate are the norm.

The labor market has also benefited from the feeling of labor shortages.

For a long time it has been more difficult to find workers than to find work.

That has stopped layoffs at times when the economy seemed to cool down and has avoided the classic spiral of recessions.

“CEOs didn't want to let people go because they said, 'Well, we've spent a lot of time and energy getting these people together, and now we have to worry about keeping them.'

So we are not going to let them go, even if we think there may be a short and superficial recession,” explained Dana Peterson, chief economist of The Conference Board in a recent meeting with correspondents.

Energy has also contributed to the strength of growth.

By squeezing its shale deposits through hydraulic fragmentation

(fracking),

the United States has broken records for oil production and liquefied natural gas exports, which has improved its trade balance.

The low price of gas in the domestic market has reduced industrial costs.

Added to all this is a policy of tax incentives that still has a lot to give, but that is already being noticed.

Mark Zandy, chief economist at Moody's Analitycs, the rating agency's research service, gave some figures from New York last month: “If we go back to before the pandemic, United States manufacturers invested approximately $75 billion per year to build new factories or renovate existing ones.

Lately, the figure exceeds 200 billion dollars annually, which gives an idea of ​​the magnitude and dramatic nature of the change.

“This dynamic is in full swing, and I don’t see it changing anytime soon.”

Protectionism

Biden's economic protectionism, through aid and incentives, has surpassed that of Trump, who used rhetoric and some rather symbolic tariffs.

Biden has benefited from companies' interest in bringing their supply chains closer together following pandemic disruptions, but his economic nationalism has also been vocational.

When criticism from other countries, especially the European Union, intensified, he rejected it: “We are being criticized internationally for focusing too much on America.

To hell with that,” he said last year at an event with unions in Springfield, on the outskirts of Washington, in the State of Virginia.

His opposition to the purchase of US Steel by the Japanese company Nippon Steel is the latest example.

Increased productivity is the other good news.

There is discussion about what the cause is and it seems that several have converged.

Post-pandemic normalization has helped.

The labor shortage has led companies to be more efficient and automate processes.

Investments in infrastructure and new factories have played their part.

And artificial intelligence is the cherry on top.

As much as Trump says that it is the prospects of his return that have boosted prices, it is the fever for artificial intelligence that has taken the stock market to all-time highs, with technology companies at the helm and Nvidia as the banner.

The so-called Magnificent Seven (Microsoft, Apple, Alphabet, Amazon, Meta, Nvidia and Tesla, although the latter is in the doldrums) have pulled the market, defying rate increases.

Americans, however, are not happy with the economy, polls show time and time again.

There are two types of reasons for this.

Some have to do with the different nature of achievements and failures.

Others are of a demoscopic type.

Regarding the first, one way of looking at it is that prices have risen for everyone, while employment has only been created for a part of the population.

“The enormously impressive labor market has not been reflected in improved consumer sentiment,” Furman explained.

Unemployment has been less serious and lasting than in other crises.

“There was less anxiety about whether you could get a job, which made a job itself less valued.

"Most people had jobs before this and still have jobs, they weren't as anxious about losing their jobs."

Furthermore, although inflation has gone down, the price level has not.

“People are still upset by the fact that everything costs a lot of money, especially basic products like food and energy.

Price levels are high and people notice it,” says Peterson.

“Many consumers are still very upset about not being able to buy the homes they want, because although mortgage rates are no longer 8%, they are still much higher than in recent years,” he adds.

And then there is demoscopy.

“There is enormous polarization in the way people respond to surveys,” says Wolfers.

Economists Ryan Cummings and Neale Mahoney of Stanford University have studied it and called it “asymmetric amplification.”

“We found that Republicans applaud more when their party is in power and boo more when their party is in opposition, and that adjusting the decibel level so that Republicans and Democrats cheer at the same volume explains 30% of the difference. between observed consumer sentiment and what could be predicted using economic fundamentals,” they argued in a recent publication.

Joe Biden, at an event in Baltimore, in January 2023. Drew Angerer (GETTY IMAGES)

How will the economy influence the reissue of the duel between Biden and Trump?

In the legislative elections of November 2022, issues such as the defense of democracy and abortion weighed more on voters than inflation, which at that time was skyrocketing.

On the road to the presidential elections, these same issues, along with the age of President Biden, 81 years old (and to a lesser extent that of Trump, 77), the criminal charges of the former president, foreign policy, insecurity and, of course, In a very special way, immigration and the border seem to matter more than the economic situation.

Maybe it's too early to say.

“If the US economy, and in particular its labor market, approaches the elections with its current level of dynamism, and with more moderate inflation, this could favor the current president.

On the contrary, in the event of a hard landing in the economy or a change in inflationary dynamics that pushes it upwards again, the context would be more favorable to the Republican candidate,” says Ricard Murillo, from CaixaBank, in a note from analysis.

Wolfers, for his part, despite the polls and the prevailing discontent, believes that the economic situation is a point in the president's favor: "Given the state of the economy, I would predict that President Biden is going to be re-elected," he maintains. , even admitting that there are many things that determine the vote.

Naka Matsuzawa, an analyst at Nomura, noted in a report to clients this month that "unlike the 2016 presidential election, Trump's victory is not an unforeseen risk, and in fact it is the main scenario at the moment, not ' yes Trump', but 'very likely Trump'.

“Many polls have revealed that Trump's favorability ratings are rising, surpassing Biden.

However, it is unclear in which direction that 'most likely Trump' will push markets and to what extent markets have priced in this possibility.

“Market opinions on the impact of a Trump victory are divided,” she added.

Zandi, for his part, emphasizes the electoral risk: “It is very likely that the presidential elections will be very close and potentially questioned.

This could generate great volatility in financial markets and undermine consumer confidence,” he says.

“It is certainly a threat in the very difficult political environment that exists in the country today,” he concludes.

Follow all the information on

Economy

and

Business

on

Facebook

and

X

, or in our

weekly newsletter

Subscribe to continue reading

Read without limits

Keep reading

I am already a subscriber

_