US exceptionalism: Can the world’s largest economy keep delivering for investors?

On many measures, the US economy’s performance in recent years has been exceptional. The Presidential election cycle provides us with convenient time periods on which to judge performance, and since the inauguration of Joe Biden, things have gone very well.

According to the most recent official data, the US economy expanded by over 9% in real terms between the end of 2020 and the end of 2023.¹  Importantly, there has been no recession, despite the Federal Reserve’s (Fed) aggressive adjustment to monetary policy. By the time American voters go to the polls in November, the current post-pandemic expansion will have lasted for 17 quarters – with only modest blips to the expansion seen in early 2022.

In current dollar terms, US gross domestic product grew by 27% between the end of 2020 and 2023. In other words, the economy expanded by almost a third in three years. It is no wonder the US stock market has performed so well. According to Bloomberg, the total return from the S&P 500 over that period was 31%, notwithstanding the sizeable correction seen during the early phases of monetary tightening in 2022.²

In 2023 alone, the S&P 500 delivered a total return of 26%. It has been exceptional. But can investors expect the US to continue to lead in terms of economic performance and market returns?

The Biden Presidency began as the US economy was emerging from the pandemic. There was an initial bounce as the economy re-opened, like recoveries seen in other developed countries. However, what marked the US out has been the coming together of the strong cyclical response to lockdown and several important and powerful structural trends and policy steps that have potentially boosted the US’s trend rate of growth. It is well understood that fiscal policy has played an important role, both in terms of the boost to aggregate demand it provided during and after the pandemic, but also through the focus on infrastructure spending. The payback to that is higher borrowing, but without fiscal stimulus, overall growth would have been weaker.

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Post-pandemic demographics

An underestimated structural factor has been demographics. According to the Congressional Budget Office (CBO), there has been a surge in the US population in recent years.³  Growth in total population is estimated to have been above approximately 0.9% in 2023 and is expected to be 1.2% this year and 0.9% in 2025. Between 2024 and 2054, the population is expected to rise from 342 million to 383 million.

Over the next decade, average annual population growth is projected to be 0.6% per year. Fertility growth dropped during the pandemic years and has recovered recently but the biggest contributor to population growth has been net immigration. This is important because the dominance of net immigration in population growth tends to mean a healthy growth rate in working age population, and this is what the CBO expects in its own projections. This also contrasts with other developed economies where either overall population growth is lower or the share of the population outside of working age is increasing (ageing, like in China). In the US, immigrants add to aggregate supply, through joining the labour force, and aggregate demand as they establish homes and families.

US immigration, as elsewhere, is a politically sensitive topic. There may be new attempts to control immigration after November’s election, but the die is cast. The US has enjoyed the fruits of an expanded labour force through immigration at a time when the participation rate has remained below its pre-COVID-19 level (there was a strong narrative of people leaving the workforce during the pandemic).

As such, over 15.6 million non-farm payroll jobs were created since the end of 2020 with the annual growth rate of job creation running at 3.2%. Expanding the labour force has allowed this job growth to take place without the unemployment rate falling below its pre-COVID-19 low. Wage growth accelerated in response to the inflation shock in 2022 but recent data show total compensation growth at around 5.5% per year, not much above the long-term average.

The demographic story is positive. The US has expanded its workforce more than other major economies, allowing growth to be strong, and the US to remain extremely competitive. And having a strong labour market has supported consumer spending, which has grown at an average annualised real rate of 3.7% since 2020. Consumer spending flows into corporate revenues.

Driving digitalisation

Population growth is important in determining overall economic performance. As important is productivity growth. Here technology is deemed to have played a major role. The US has first mover advantage in many technological innovations, being home to major technology leaders. Ongoing digitalisation of services and the advent of artificial intelligence-driven technologies are important, and US companies have led the way. The employment of new technology at an aggregate level can be gauged by what companies are spending their investment dollars on.

According to the Bureau of Economic Analysis (BEA), investment spending on intellectual property products (including software) increased by 24.7% between 2020 and end-2023. In the BEA’s estimates of industry growth rates, the information technology sector grew at annual rates of 14.7% in 2021, 7.5% in 2022 and 6.2% last year, contributing 0.33% of the overall GDP growth rate of 2.5%.⁴

After negative growth in 2022, as GDP slowed in response to monetary tightening, productivity accelerated last year. The BEA estimates year-on-year labour productivity growth of 2.3% and 2.6% in the last two quarters of last year. More workers being more productive.

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Political backing

There have been other drivers of growth – there have been various policies introduced by the Biden Administration – particularly the Bipartisan Infrastructure Law, the Inflation Reduction Act and the CHIPS and Science Act. These are longer-term forces given the life cycle of projects designed to grow renewable energy, and invest in roads, railways, and the digital network. As of last September, investment in more than 450 new or expanded clean energy projects had been announced, totalling over $160bn.⁵  Renewable energy sources now account for 25% of total US electricity generation.⁶

The supply-side flexibility afforded by a growing labour force and technology-enabled and policy-driven productivity growth has served investors in the US well. Equity investors have benefitted from strong corporate profitability. Corporate profit growth has slowed but the profit share in GDP has remained above 12% since the end of the pandemic.⁷  Sectors such as information technology and healthcare provide investors with long-term earnings growth opportunities that are not matched in other markets. For sustainability and impact-focused investors, we believe the US equity market provides many opportunities to gain access to companies that are developing the technology and services that help mitigate climate change and biodiversity loss. 

Diversified yield

For fixed income investors, the US corporate bond market provides greater liquidity, depth, and diversification than anywhere else. The health of US companies has underpinned credit quality in both the high grade and high yield markets. Corporate bond credit spreads have declined since 2022 and, in the high yield market, spreads do not account for any rise in default rates to more normal long-term averages. But that reflects the quality of borrowers, good credit fundamentals and a healthy macroeconomic backdrop.

Should we expect this exceptionalism to persist? There are clear threats to the story coming from the potentially unstable path of US federal government borrowing and the rising cost of servicing debt. The geopolitical situation is uncertain and the trade war with China could easily worsen. Domestically, any social unrest like the disorderly transfer of power seen in the wake of the 2020 Presidential election could be harmful to economic growth. More prosaically, inflation may not let the Fed cut interest rates as quickly as investors had hoped.

However, the demographic story is a long-term one, as is the technology story. And, despite the pushback against responsible investing in some quarters, the US is clearly on an irreversible path towards decarbonisation. These are all positive drivers for investors. Growth equities, corporate bonds and the high returns offered by the public and private leveraged finance markets should all continue to thrive because of the undeniable strength of corporate America.

The US has outperformed, and it is hard to bet against it continuing to do so. Just look at the external value of the dollar. Against other major currencies, the dollar is close to a 20-year high. The US is exceptional, and the greenback is king.

Past performance is not an indicator of future returns.