The US economic recovery is gathering momentum. January’s impressive labour market report showed that the US is in the midst of a long, sustainable upswing that could surpass any other business cycle in the post-1945 era. QE has proved to be a powerful monetary policy tool in the US. Low short- and long-term interest rates have set the stage for an investment boom that will drive a virtuous cycle of supply-led growth and low inflation.

Some commentators nevertheless claim that the US economy is operating a long way below “trend”. They have invoked the concept of secular stagnation to describe an economic recovery that remains too weak. A lack of demand, slow productivity growth and an ageing population have combined to squeeze wages for many workers. It is not just the low paid that are suffering: many in the middle class are falling behind too.

Contrary to the assertions of these pessimists, however, “productive” investment – notably in information technology – is rising strongly in the US. Higher investment is leading to more jobs. According to the Bureau of Labor Statistics, vacancies in professional and business services soared to a record 1.03m in December last year – an increase of 51.2 per cent over a year earlier. In total, US businesses created 3.04m jobs in 2014. The increase in private non-farm employment was the biggest for any year since 1997. The unemployment rate edged up to 5.7 per cent in January, but it has consistently fallen faster than the Fed – and most other economists – forecast. The jobless rate could well dip below 4 per cent over the course of this economic cycle.

The strong rise in investment has been concentrated in information technology. Spending on software is running at record levels in real terms and as a share of GDP. Firms are committing greater sums to research & development (R&D). Record profits are being recycled into higher share buybacks, but the increase in R&D also suggests that they are being used to drive up the potential growth path of the US economy.

None of this should be a surprise. The US has led the world in technology since the internet boom of the late 1990s, and the dip in technology spending following the credit crunch of 2008 was very short-lived. This partly reflects the limited reliance on bank funding for many companies operating in the technology sector.

Critics cite the relatively slow growth of real GDP and the low rise in productivity to support their case for secular stagnation. Unemployment may have fallen, but economic growth in the US has not been above 3 per cent in any year since the recovery began.

David Fuller's view

This view is very much in line with what Fuller Treacy Money has been discussing over the last five years.  In fact, I would go further and say that the USA has held a technology lead for over a century.  Moreover, the USA’s rate of technological innovation began to accelerate approximately 25 years ago, at a time when it was fashionable to say that America risked becoming uncompetitive.  More importantly, this rate of advancement is clearly exponential.

The many reasons why US GDP growth has been slow in recent years can be explained by the 2008 spike in crude oil, coinciding with the onset of a credit crisis recession.  This led to massive deleveraging by both corporations and consumers, significantly reducing the US Government’s tax revenue in the process.  It takes from 5 to 10 years to recover from a severe credit crisis recession, as I have often mentioned. 

Technology has certainly been the big growth leader for years, and this provided the knowhow for America’s massive increase in oil and gas production, mainly via horizontal drilling and fracking in shale deposits.  The oil industry has now gone from strong growth to recession, due to global oversupply, slowing US GDP growth in the process.  However, the broader economy’s reaction will be shallow because everyone benefits from lower energy prices, except for the producers of that energy, although they will be able to sell more.  Technology will come to the rescue once again, over the medium term, by reducing the costs of extraction and improving the efficiency of other forms of energy, not least solar.  

Lastly, US GDP has gradually and erratically shown signs of modest growth despite the headwind of a redistributive White House and a dysfunctional Congress.  The likely presidential candidates in 2016 will be more favourable for the US economy.  I would not be surprised if GDP growth improved over the next several years.  That would support the US stock market, provided interest rates do not rise too rapidly.  

(See also Eoin’s comments below.)