US economy: abnormal boom or bubble about to burst?

Source: Zhou Ziheng Recently, there has been a lot of writing and commentary about "American exceptionalism," the idea that the U.S. economy has been surging ahead in economic growth, high-tech investment, and productivity, leaving the rest of the world behind. It's no surprise, then, that the dollar is higher and the stock market is booming. This success has been attributed to less regulation, entrepreneurship, lower investment taxes, and so on—in other words, the absence of the government intervention that has plagued Europe, Japan, and other advanced capitalist economies. There's a lot of optimism about America's success, even among the broader public, not just in the stock market. The U.S. RealClearMarkets/TIPP Economic Optimism Index has risen to its highest level since August 2021, but remains below pre-pandemic levels.

But this boom story is misleading. Yes, the US economy is doing better than Europe or Japan. But has it really been better than Europe historically? Take a recent Financial Times article titled Why the US economy is so far ahead of its rivals, which praises the US’s performance relative to Europe. The authors continue: “The United States is growing far faster than any other advanced economy. Since the end of 2019, U.S. GDP has increased by 11.4%, and the International Monetary Fund predicts in its latest forecasts that the U.S. economy will grow by 2.8% this year.” And: Its growth record is rooted in faster productivity growth – a more durable driver of economic performance… Since the 2008-09 financial crisis, U.S. labor productivity has increased by 2.8%. 30%, more than three times that of the eurozone and the UK. This productivity gap, visible for a decade, is reshaping the hierarchy of the global economy.  ”

Furthermore: “U.S. productivity growth is rapidly outstripping that of nearly all advanced economies, many of which are trapped in a vicious cycle of low growth, falling living standards, strained public finances, and eroded geopolitical influence.”

The problem with this argument is that everything is relative. Note the title of the article: Why the US economy is soaring – Ahead of its rivals. The US economy is soaring, etc… but only ahead of its rivals. Yes, compared to Europe and other advanced capitalist economies (not to China or India, of course), the US is doing much better. But that’s because Europe, Japan, Canada are all stagnating or even in outright recession. Historically, the US economy is doing worse than it did in the 2010s, and worse than it did in the 2000s.

Take productivity growth, for example. Here’s a chart from the Financial Times that illustrates US exceptionalism. But if you look closely at the trajectory of the US productivity growth line, you’ll find that US productivity growth has been slowing since around 2010. Its relative outperformance is entirely due to slowing growth in the rest of the G7. As the Financial Times article says: “Data from the Conference Board show that labour productivity has fallen in most advanced economies relative to the US over the past few years.” Relative to the US, yes, but US labour productivity growth has also slowed, even if not as much. In fact, if we look at the history of productivity growth, we see that capitalist economies have been increasingly unable to expand capacity and raise labour productivity. You can see this in the chart below. US productivity growth in 2006-18 was much better than in other major capitalist economies, but at only half the rate of the 1990s.

The same applies to productive business investment. The Financial Times shows a chart showing that US business investment is growing faster than other economies. But it is also important to note that the US investment growth trajectory is also slowing: compare the current growth rate with the growth rate in the 2010s, or even with the growth rate in the 2000s. US business investment is slowing down in the long term, while business investment in other G7 countries is stagnating.

Let's look at another chart showing the historical trend of US economic growth.

Average annual U.S. real GDP growth has fallen from 4% in the postwar “golden age” to 3% before the Great Recession, and below 2% in the period since (which I call the Long Depression). The consensus forecast for U.S. growth in 2025 is now only 1.9%. But that would still be the fastest growing economy in the G7.

Besides, we are measuring real GDP growth here. In recent years, the rapid growth of the US economy has been largely due to immigration, which has driven the growth of the labor force and overall output. After the epidemic, although the growth of per capita output in the United States is much lower than that of other G7 countries, it is still higher than that of other countries. The following chart of US and European growth trends better illustrates this situation. In the 21st century, the growth rate of the United States has been declining; while the growth rate of Europe has been declining.

In addition, the performance of the US capitalist economy is relatively better than other developed economies, but this does not mean that the lives of ordinary Americans are better. As the Financial Times article acknowledges: “Despite the strength of the US economy, according to the OECD, the US has the greatest income inequality of the G7, as well as the lowest life expectancy and the highest housing costs. Market competition is limited and millions of workers endure precarious employment conditions. ” That’s hardly a job poster for life in the US, even if stock market investors don’t care. If we’re talking about relative growth in per capita income in the US, take a look at this table I compiled from the World Inequality Database. Average earners in the US have seen less and less income growth (even in relative terms), especially in the 21st century. Still, some argue that U.S. productivity is booming, thanks to the introduction of AI and other technological investments that are unmatched by the capitalist world, including China. As Citigroup chief economist Nathan Sheets puts it, despite these Chinese efforts and efforts to become an AI superpower, the United States remains

“where AI is happening and will continue to be where AI is happening.” There are signs that US productivity growth may be accelerating – although note that the chart below is an estimate.

Perhaps so, but the huge investments in AI have yet to have a real effect across the economy, which could result in enough job cuts to sustain big gains in productivity per capita. That may take decades. In fact, there is a lot of evidence that the AI ​​craze may be just a bubble—a huge growth in what Marx called fictitious capital (i.e., investment in AI-related company stocks and dollars) that is seriously out of sync with the reality of profits and productive investments enabled by AI.

Ruchir Sharma, chairman of Rockefeller International Corporation, again in the Financial Times called the US stock market boom "the mother of all bubbles." Let me quote: “Global investors are pouring more capital into one country than at any time in modern history. U.S. stocks are now trading at a premium to other markets. Relative prices are at their highest levels since data became available more than a century ago, and relative valuations are at their highest levels since data became available half a century ago. As a result, the U.S. accounts for nearly 70% of the world's major stock indexes, up from 30% in the 1980s. By some measures, the dollar is trading at a higher value than at any time since developed countries abandoned fixed exchange rates 50 years ago.”

But”

style="">Markets have gone overboard in their reverence for ‘American exceptionalism’…Talk of a tech or AI bubble, or a bubble in investment strategies focused on growth and momentum, obscures the source of all bubbles in the US market. The US has completely dominated the mind-space of global investors, being over-owned, over-valued and over-hyped to unprecedented levels. As with all bubbles, it is hard to know when this one will burst, or what will trigger its fall.”

And the support for this bubble is very thin. The US stock market drives the world’s stock markets, and there are only seven stocks that drive the US stock market:the so-called Big Seven. For the vast majority of American companies, outside of the booming energy, social media and technology sectors, the situation is not rosy. Free cash flow per share for S&P 500 companies has not grown in three years (see the red line in the figure below). Profit growth forecasts have diverged sharply from actual growth.

The ratio of corporate debt to earnings in the United States remains near historic highs, and the interest costs on these debts have not fallen significantly since the Federal Reserve decided to start cutting its policy rate. The average cost of debt spread between smaller companies in the Russell 2000 and larger companies in the S&P 500 has more than doubled to about 300 basis points recently. With medium- and long-term interest rates still rising, there are few signs of relief in the short term.

The number of corporate bankruptcies in the United States in 2024 has exceeded the level during the epidemic in 2020. The surge in bankruptcies seems as if the U.S. economy is in trouble.

Productivity growth has slowed across the major economies as productive investment growth has fallen. And in capitalist economies, productive investment is driven by profitability. Neoliberal attempts to increase profitability after the profitability crisis of the 1970s were only partially successful and ended at the beginning of the new century. The stagnation and "long depression" of the 21st century have been characterized by rising private and public debt as governments and businesses have tried to overcome stagnation and low profitability by increasing borrowing. This remains the Achilles’ heel of American exceptionalism. The story of American exceptionalism is really the story of Europe’s collapse – that’s another story.