Nobody believes in the US economic miracle

American voters still don’t thank their president for high growth, more jobs and lower inflation

Stock markets close to record highs, economic growth powering ahead at an annualised rate of 3.3pc, rising consumer confidence, an abundance of job creation, a veritable boom in infrastructure investment, inflation seemingly once more under control, and companies at the forefront of the artificial intelligence revolution. From across the pond in moribund Europe, where economies are stagnating or contracting, America looks as if it’s thriving.

Given this apparent success, you might also expect President Joe Biden to get at least some of the credit for it – and for this to be reflected in voters’ attitudes. “The economy, stupid” was the slogan that James Carville, Bill Clinton’s campaign strategist, had emblazoned on his desk to remind everyone of the importance of the economy as an electoral issue.

Yet far from bolstering his chances of re-election in November’s presidential election, Biden finds himself struggling in the polls. These predominantly show Donald Trump climbing to a material and sustained lead since late October, and not just because of growing concern over Biden’s age and apparent lapses in memory. If the US economy is booming, Americans don’t yet feel it. Trump’s alternative narrative – that the country is dying on its feet – seems to be the one with the greater traction.

The read through from economic to political success has always been a haphazard one, particularly in America, where the complexities of the electoral system can yield startling results. Oddly, people are often as inclined to vote for change when things are getting better than when they are getting worse.

What’s more, and despite Trump’s chaotic handling of the pandemic and a growing mountain of legal cases against him, the Trump years as president have recently undergone something of a rehabilitation even in apparently well-informed circles. Jamie Dimon, the world’s most powerful banker and one time Democrat supporter, recently said that Trump had been “kind of right” about a lot of things, from Nato to immigration, and China to tax reform. It is perhaps these other things that have assumed greater importance in a country that is increasingly polarised by issues that have little or nothing to do with the economy. But there is also an underlying concern that the apparent strength of the US economy is not all that it seems.

It cannot be said often enough, but the stock market is not the economy. It nevertheless provides the best gauge we’ve got on what investors collectively think about the future. And here the mood seems positive to irrationally exuberant. The great AI goldrush is only part of the explanation. Valuations are also underpinned by belief that the US Federal Reserve is about to pull off the seemingly impossible – a soft landing, or in other words, bringing inflation back under control without inducing a recession and a steep rise in unemployment. This in turn would allow for the resumption of much lower interest rates, and a consequent further boost to asset prices.

Much of the current data would suggest that the Fed has indeed achieved this Houdini-like escape. There’s growing evidence of a Goldilocks economy: not too hot, not too cold, but just right. Economic opinion is none the less fiercely divided between those who think the economy is running too hot, further delaying the date at which the Fed thinks it safe to start cutting interest rates, or is already cooling fast, implying that the Fed has left it too late, causing the economy to stall. The GDP and jobs data point to the former, but the January fall in retail sales to the latter.

You pays your money and you takes your choice. Yet however you cut it, the passage back to the calmer economic conditions that deliver elevated stock market valuations is a remarkably narrow one. Personally, I’d be surprised if the balmy economic weather holds long enough to buy Biden a few more votes.

But the real concern is quite how dependent America’s growth is on fiscal stimulus. For how much longer can the US keep running federal deficits of 6 per cent or more, the level forecast earlier this month by the Congressional Budget office? Deficits have exceeded that benchmark only three times since the Great Depression – during and shortly after the Second World War, the 2007-2009 financial crisis and the pandemic. And yet now it seems almost to have become the norm. On its current trajectory, US national debt is expected to reach nearly 120pc of GDP by 2034, the highest level ever recorded. It will continue rising thereafter.

From Biden’s point of view, this might be thought of as money well spent if it secures a second term in the White House. But it doesn’t even seem to be doing that. Take Georgia, a state often held up as a poster-child for Biden’s Inflation Reduction Act (IRA) and various other infrastructure spending initiatives.

Yet Brian Kemp, Georgia’s Republican governor, is almost contemptuously dismissive. “A lot of what the IRA has done, besides throwing money at something that was coming anyway, has also heated the market up and driven costs to go up,” he told the Financial Times in a recent interview. His comments are echoed nationally. In a recent NBC poll, Biden’s approval rating on the economy slumped to just 33pc, with Trump opening up a 22pc lead. Trump has said he’ll scrap the IRA tax credits and many of Biden’s other spending initiatives, but don’t expect the deficit to narrow accordingly under his leadership. Resumed tax cuts are one of Trump’s flagship policies; what Biden borrows to spend, Trump intended to spend instead on lower taxes.

In this sense, policy is pretty much indistinguishable. Both presidential candidates are deficit deniers. Continued dollar hegemony just about supports such fiscal recklessness for now; there is no credible alternative to the dollar as an international reserve currency as things stand. But if nothing is done to correct the position, credit risk will at some stage become an issue. Growth based substantially on borrowing from the rest of the world cannot be sustained indefinitely.

So both from a long term and short term perspective, America’s economic miracle looks skin deep. All things are relative, of course, and compared with Europe, this is a nice problem to have. But it doesn’t help Biden. Voters can see the fault lines, even if the markets don’t. The president can pump prime all he likes, but as everyone knows, there’ll eventually be a price to pay.

‘I’d be surprised if the balmy economic weather holds long enough to buy Biden a few more votes’