Three decades ago, former US president Ronald Reagan declared “Morning in America” after years of economic turmoil. His timing was perfect. Several years of boom ensued. No one today would dare muse about the US being a “shining city on the hill”. There have been too many false dawns since 2008 for that. Yet, a corner has been turned. The recovery under President Barack Obama has been painfully slow by post-war standards, but it is fast compared to most of the rest of the world. There is also more to come in 2015. The US should enjoy the afternoon sunshine while it lasts.
Most of America’s good news is relative. The US is estimated to have grown last year by 2.6 per cent — roughly half a percentage point higher than the previous five years of recovery. This was weak compared to all previous US recoveries barring the first business cycle of the 21st century. But it looks stellar compared to the Eurozone, which barely cleared 1 per cent. This coming year is likely to be very similar. The US will grow by around 3 per cent while the Europeans and Japan would be lucky to exceed 1 per cent.
Moreover, US unemployment is falling more rapidly than it has in years. With almost three million jobs created, 2014 was the best year for the US labour market since 1999 — the height of former president Bill Clinton’s boom. At 5.8 per cent, the US jobless rate is almost half the rate of the Eurozone. Most of America’s new jobs may be casualised and poorly paid. But they are jobs nonetheless. By contrast, countries such as Italy, France and Spain are unable to generate jobs of any description. A whole generation of Europeans is withering on the vine.
The next few months will crystallise the growing US-Europe divergence. At some point — probably in June — Janet Yellen’s Federal Reserve will begin the long-awaited turn in the US interest rate cycle. Should the US continue to create more than 250,000 jobs a month, that point could come sooner. The era of exceptionally easy money is at an end in the US. With luck, the European Central Bank will head in the opposite direction. Alas, the ECB is still debating how and on what scale to deploy the same kind of tools that have helped dig the US out of the post-2008 slump. In 2015, Europe will still be waiting for Godot while the US will be coping with a return to normality.
That is America’s good news. But it is of the type that used to qualify as bad. Nor will it persist for very long. The US recovery is already mature — there is no Clinton-style middle class boom around the corner. In spite of seven years of zero interest rates, the US has yet to clear the 3 per cent growth milestone. Free money does not go far nowadays. Long-run trend growth has fallen from above 3 per cent to about 2 per cent. The US middle-class has yet to regain its pre-2008 median income levels. It would take several years of 3 per cent growth for that to occur. The chances are this business cycle will come to an end in 2016 or 2017 without that having happened.
The contrast with the Reagan years is telling. In those days, the US was the twin-engined motor of the global economy. Today, the US is not strong enough to lift the rest of the world out of a downturn. But it is robust enough to continue to motor ahead even if Europe and Japan stall. The most important ingredient in the recent US growth spurt is the near-halving in the global oil price in the past six months. That has put hundreds of extra dollars in the pockets of Americans each month, boosting consumer spending. If the price of oil stays below $60 a barrel in 2015, the windfall will add about half a percentage point to US headline growth — enough to make up for the absence of real wage growth.
The more persistent lift has come from rising US asset prices. The stock market boom has helped revive the housing market and pension valuations. Some of the gains are vulnerable to a tightening of US interest rates. Some may also be jeopardised by the type of crisis that so often follows a turn in the US monetary cycle. Risk forecasters spend half their time nowadays searching for unexploded bombs on emerging market balance sheets. Yet, by historic standards, the US equity markets are not yet in bubble territory. US corporate balance sheets are also strong. Barring a global meltdown, the surge in American asset prices ought to survive gradual monetary tightening.
Why, then, are so few people celebrating? The answer is simple. Most Americans are worse off than they were at the beginning of the 21st century, while the top sliver are dramatically richer. There is no reason to believe the US has found the answer to that. Relative to most of Europe, America’s middle-class have better prospects, particularly in the short term. But in the long run, they are all subject to the same grand squeeze.
The US system still has the wherewithal to generate growth — albeit with gains captured almost wholly by the top echelons. But it is neither the American citizens’ parents’ recovery, nor their grandparents’. This year will be America’s best in a decade. It will nevertheless elude most Americans.
— Financial Times
