We all know that America is different. But last week’s revised growth figures for the third quarter underlined this point. At an annualised rate, the economy was shown to have grown by 5.2pc which, excluding the pandemic period, was the fastest pace of growth since 2014.
What a contrast with the lacklustre performance of the UK economy and indeed much of Europe. What explains current US economic strength?
One thing that currently sets America apart is President Biden’s 2022 Inflation Reduction Act which, despite the misleading name and its unfortunate acronym, IRA, mostly comprises a package of subsidies for clean energy. They are worth about $370bn over a decade.
Yet the overall effect of this package over 10 years is supposed to be fiscally contractionary. Nevertheless, the subsidies have contributed to a boom in high tech industries, and helped to sustain growth of business investment which has been a significant contributor to the economy’s recent strength.
By contrast, as you might expect in current world conditions, net exports have not been a contributor to the economy’s recent strength. The current account of the balance of payments is in deficit to the tune of 3pc of GDP.
The overwhelming source of the economy’s strength is consumers’ expenditure. It is usually difficult to keep the American consumer down. Even so, the current strength of consumers’ expenditure is somewhat surprising. In the third quarter it was up at an annualised rate of almost 4pc, compared to 0.8pc in the second quarter.
You might think this is especially surprising because of the negative impact from the huge rise in interest rates. Official short rates have risen by 5pc in record quick time. Moreover, long government bond yields, which determine the cost of most mortgages, have risen by a huge amount as well.
But here we come up against another of the factors that marks out America as being different from almost anywhere else, namely the prevalence of long-term fixed rate mortgages.
Whereas in the UK, when we say fixed rate, we usually mean rates fixed for something like three years or, at most, five. In America it is normal for mortgages to have rates that are fixed for 30 years. For all those homeowners with such mortgages, increases in official interest rates and bond yields have had no impact on their mortgage payments.
Even so, this does not quite explain the resilience of overall consumer spending because it ignores the position of new borrowers. Over the last year, they have had to borrow at rates that were fixed for 30 years at a far higher level than earlier.
Only very recently have long bond yields, and hence mortgage rates, started to come down appreciably. The result is that over the last year, mortgage payments have increased by 7.6pc, roughly the same as the increase in rents.
Admittedly, as in the UK, the labour market remains strong, even though employment growth is slowing. Unemployment is creeping up a bit but it is still extremely low. And consumers’ net wealth is still close to a record high.
The recent sharp fall in inflation, which in October dropped to 3.2pc, down from a peak of 9.1pc in the middle of last year, will help. With average earnings increasing at 4.1pc, this means that real incomes are now rising. But over the third quarter as a whole, real earnings were unchanged.
The biggest single factor behind the strength of consumers’ expenditure is, believe it or not, the continued influence of the huge sums paid out by the US government during the pandemic.
Over 2020 and 2021, the Government dished out about $5 trillion in covid relief, much of it directly to households. For a typical family of four, this translated into a handout of about $10,000.
As happened in the UK and indeed all of the rest of Europe, initially US households could not spend much of this money. The result is that they built up a substantial holding of excess savings which they have gradually been running down. This is a one-off factor and this boost will end sometime soon. But it seems that it still hasn’t yet run its course.
But the outlook is not rosy. The signs are that the economy is slowing in the last quarter of 2023 and will probably do so further at the beginning of next year. The boost from the enormous Covid stimulus package will soon be running out of steam.
Meanwhile, for those of a monetarist disposition, the money supply figures are screaming danger, with the M2 definition of the money supply having fallen now for most of the last 18 months and registering a contraction over the last year of 3.3pc. I suspect that the US economy may just about avoid a recession but many monetarists would disagree.
Looking further out, if there is a fly in the ointment, it is the fiscal position. In the latest financial year, the US government’s deficit amounted to about 7.5pc of GDP, compared to 5pc of GDP for the UK this year.
Moreover, this follows a run of large deficits which has seen the ratio of US Federal government net debt to GDP rise to 95pc. Not only that, but if the economy goes through a very soft patch in the next year or two, never mind a recession, then the deficit will increase.
Accordingly, there doesn’t seem much prospect of the debt ratio falling back anytime soon. Indeed, the independent Congressional Budget Office reckons that over the next 30 years the debt ratio will rise to 180pc of GDP.
For a normal country, this would be dangerous territory.
Admittedly, America isn’t a normal country. Because of its size and power, it can get away with things that other countries cannot. Even so, however good the US economic performance looks at the moment, there may be a nasty shock lying out there somewhere in the not too distant future.
Roger Bootle is senior independent adviser to Capital Economics