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The writer is co-founder of Centerview Partners
Since the first interest rate increase in March 2022, discussions about the US economy have centred on two questions. First, can the Federal Reserve pull off the much-vaunted soft landing? Second, if we do face a downturn, will it be deep and enduring or shallow and transient?
It’s time to swap the metaphor of the soft landing for a new term: economic acceleration. True, our economy faces undeniable near-term headwinds, from a shaky commercial real estate sector to rising gasoline prices. But there are reasons to believe the US economy is primed to deliver robust and durable growth over the longer term.
Based on the regular conversations I have with business leaders across sectors, I believe most economic forecasts have failed to account for innovations in our economy that could add 0.25 to 0.50 percentage points to gross domestic product growth over the longer-term.
Among the many reasons to be optimistic, six factors in particular are powering this shift. First, despite some lingering market pessimism, corporations are performing ably. The pandemic’s challenges built resilience, and chief executives have become adept at managing through inflation, adopting technology to improve productivity and allocating capital to achieve long-term goals. In June, the CEO Confidence Index reached its highest level in more than a year.
The second factor driving the potential economic acceleration: labour force dynamics benefiting both companies and workers. In the post-pandemic era, workers have become more empowered, with a tight labour market yielding higher wages and more employment opportunities. At the same time, companies are emphasising workforce continuity and placing a higher premium on a stable and trained workforce.
Information technology also has helped companies burnish profit margins and manage through volatility which, in turn, has helped reduce cost pressures. Today, companies such as Walmart and Target can change inventory selection based on demand in real time. Purchasing orders that used to take days or weeks can now take mere minutes. As a result, companies can better manage their spending, inventory and risk. All of that is to labour’s benefit because it reduces the need for dramatic headcount reductions.
The fourth factor is sustained strength in consumer spending. Since 2019, market forces and smart policy decisions have supported and empowered consumers. Pandemic-era government aid helped buttress Americans’ economic health. Real wages grew between 2019 and 2022, with the strongest growth taking place at the bottom of the wage distribution. That wage growth has remained consistent and eclipsed the rate of inflation. Household cash balances remain elevated, too, fuelling continued spending growth even in the face of higher prices.
The fifth factor is the role innovation-minded mergers and acquisitions plays in achieving longer-term growth. Historically, the objectives of M&A were volume, new products and markets and, yes, cost rationalisation. More recently, the strategic rationale has shifted to strengthening a company’s innovation engine. There has been a focus on targeted marketing, supply chain enhancement, new product distribution routes and improved manufacturing footprint. A range of retail companies, for example, have acquired distribution and advanced same-day delivery technology.
And we should not discount the growth to come from strategic, sweeping government investment in the US economy. The majority of the nearly $3tn in federal funding devoted to productive investment that has passed over the last four years has yet to be spent. Alongside this public investment is a galvanised private sector that looks forward to increased public-private partnerships. In Ohio, for example, Intel is investing up to $100bn in building its new semiconductor manufacturing hub, thanks in part to the federal tax credits aimed at incentivising such projects.
There are still open concerns for policymakers and business leaders, and the country hasn’t fully turned the page on inflation or addressed many of our policy challenges. There are shorter-term risks that could bring volatility. But several signals indicate strong and sustained growth in the years ahead, a change that should both delight investors and validate recent economic policy choices. It’s time to cast off the questions of how bad a recession might be, and talk instead about how long an upcoming growth cycle will last.
Source: Economy - ft.com
