John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
With the U.S. government shutdown interrupting the release of most official data, we’re left fumbling in the dark when assessing the American economy. And when we assemble a picture from private data sources and the Federal Reserve banks, which fund their own operations and so aren’t affected by the government shutdown, what we obtain leaves things no clearer.
Some data suggests the U.S. economy is booming, but some equally suggests it’s heading into a recession. It’s a coin toss which is right – a nightmare for investors, but also for the Federal Reserve Board, which must decide whether to stimulate a sluggish economy or restrain an overheating one. Pick the wrong horse, and the losses could be severe.
The Atlanta Federal Reserve conducts a nowcast that currently estimates the economy to be growing at more than 3 per cent a year. Household demand also seems to have picked up strongly in the past few months, leading some observers to conclude that the sharp economic downturn early in the new year was just a blip.
Fed and U.S. banks seem to be in different worlds
Some private surveys reach similar conclusions. For example, the Carlyle Group, which, like all big private equity firms, conducts its own research, calculates last month’s annualized growth rate to have been 2.7 per cent.
Meanwhile, the Chicago Fed’s monitor of U.S. labour market conditions reveals a job market that, if a bit softer than a year ago, is still pretty resilient, with unemployment low at around at just over 4 per cent and most job seekers able to find work. The Atlanta Fed’s wage tracker similarly shows that while wage growth is down from the torrid pace of the rebound since the depths of the pandemic, it’s holding steady at about 4 per cent a year.
All told, therefore, the U.S. economy would seem to be weathering the storm that’s affecting the other Group of Seven economies, which have slowed rapidly or are in recession. Apollo Global Management has put together a compendium that paints a picture of an economy that is still pretty healthy, with a softer labour market and declining real estate values, but profit margins at record highs. In other words, the United States may be slowing, but it’s still growing strongly.
However, the same compendium shows inflation to be rising. We’ll get a better idea of this on Friday when the Bureau of Labor Statistics unveils its delayed consumer price index report, but there are growing signs inflation is getting worse. Meanwhile, other indicators reveal serious strains in the economy. Recent surveys by the Institute for Supply Management pointed to a service sector that is flat and a contraction in manufacturing.
Various surveys also found tariffs were starting to hit demand, which may be ominous because the full impact of President Donald Trump’s tariffs is only expected to start coming home to consumers about now. The spending binge over the summer was accompanied by a falling savings rate rather than rising wages, which suggests Americans are spending their gains from a rising stock market – essentially borrowing from their own savings rather than selling their stock while the market is still rallying.
U.S. reports stronger-than-expected second-quarter economic growth Paul Wiseman
Thus, not only would rising prices crimp that demand, but so too could a slowdown in the stock market. Already, recent consumer confidence surveys have come in weak, and we know most of the spending growth in the U.S. economy comes from the richest fifth of Americans. Most other Americans are treading water just now, and Moody’s reckons that 22 states are already in recession.
So, depending on which angle you look at it, the U.S. economy may be booming, or it may be busting. But there’s another possibility: that like a superposition in quantum physics, the economy is simultaneously booming and busting.
That’s because there appear to be two U.S. economies: the traditional one and the artificial intelligence one. The former is struggling, the latter is taking off, lifting the overall average and the incomes of those invested in it – that top 20 per cent. Some estimates are that if AI is removed from the equation, the U.S. economy is barely growing at all and is as sickly as Canada’s.
Added to this is the radical uncertainty of the second Trump presidency. The administration is profoundly reshaping the economy, and we just don’t know what will happen since we have so little experience with this sort of thing. For instance, slow job growth could be a sign of a slowing economy. Alternatively, it could be the result of the sharp drop in immigration, concealing strength among workers who can now bargain for better wages.
It would therefore all come down to which way AI goes. If the technology turns out to be transformative, the U.S. may be on the cusp of a new golden age. But if it turns out to be a dud, the market will crash, and the economy will sink into recession. So, place your bets, make your popcorn, then sit back to watch how this plays out.