The US out-competes everyone—no chance of relative decline due to structural factors

Will, senior reporter at Fortune, covering markets and the economy. "This is the ‘special sauce’ behind American exceptionalism—and why the U.S. stock market could continue dominating", Fortune, 6-23-2024, https://fortune.com/2024/06/23/american-exceptionalism-us-economic-outlook-stock-market-forecast-dollar-dominance-europe-china/ LJS

For economists, analysts, investors, and the like, American exceptionalism refers to the relative outperformance of the U.S. economy and stock market compared to its developed peers in recent decades, particularly in the wake of the pandemic. It’s the idea that there’s a confluence of factors—a special sauce, if you will—that has made the American economy and markets structurally more robust and resilient in the 21st century.¶ There’s certainly some evidence to back up this thesis. U.S. GDP per capita has surged compared to its developed peers’ over the past decade.¶ In fact, while the U.S. and eurozone had roughly the same overall GDP in 2008, the U.S. economy is now about double the eurozone’s. ¶ And a decade ago, the Chinese economy’s rise to overtake America’s as the world’s largest was seen as inevitable. But amid a real estate crisis that’s battered China’s middle class, soaring youth unemployment, a crackdown on businesses, an expanding trade war with the U.S., and the end of debt-driven growth, that trajectory is now in question. Warnings of a “lost decade” have gotten louder, especially as President Xi Jinping adopts more ideological policies that weigh on growth. ¶ In financial markets, U.S. outperformance is apparent too. Since the beginning of 2009, U.S. stocks have trounced the competition, with the S&P 500 soaring more than 500%, while Japan’s Nikkei 225 jumped 336%, and Europe’s STOXX EURO 600 rose just 130%.¶ The list of reasons behind this run of American outperformance is long and varied. Experts point to several long-term strengths, like the U.S.’ labor market flexibility and robust capital markets, as well as more recent or short-lived dynamics, including growing energy independence and an aggressive monetary and fiscal response to COVID-19.¶ “I'm very much a believer that American exceptionalism isn't a temporary phenomenon, but will continue for the rest of the decade and maybe beyond,” Ed Yardeni, the veteran Wall Street strategist and economist who runs Yardeni research, told Fortune. ¶ In fact, since the beginning of the decade, he's been predicting a “Roaring 2020s scenario” that features a productivity and AI-induced U.S. economic boom. While some deride claims of American exceptionalism, Yardeni—and a number of other veteran investors like him—are willing to put money on it.¶ “I've been recommending overweighting the U.S. for a long time in a global portfolio, since 2010,” Yardeni said. “I think that that's worked really well and should continue to work.”¶ Of course, there’s always a counterpoint worth mentioning. MUFG’s head of U.S. macro strategy George Goncalves questioned whether the U.S. economy and markets are truly exceptional, or whether they’re only the “cleanest shirt” in a dirty closet of struggling developed economies. He also noted that the U.S. economy continues to be full of haves and have-nots amid sky-high income and wealth inequality. ¶ “American exceptionalism creates this perception that everyone’s benefited,” he said. “And I don't think that’s true.”¶ Finally, Goncalves wondered if the U.S.’ recent run of outperformance compared to its developed peers can continue, given that so much of it has been driven by record fiscal spending, and the national debt is now over $34.7 trillion.¶ “Is that sustainable? Interest costs matter and consumers have run out of excess savings,” he told Fortune. “It’s almost like a sugar high has created this perception of American exceptionalism when the reality is it was mostly just a big spending spree.” ¶ Still, others point to several key advantages, both long- and short-term.¶ U.S. ‘special sauce’: Long-term keys to American exceptionalism¶ Chris Konstantinos, chief investment strategist of RiverFront Investment Group, a Richmond-based investment management firm, is an American exceptionalism believer who has been dissecting the factors behind the phenomena for quite a while. In an interview with Fortune, he explained that several years ago his team was looking at profit margins in the industrial sector around the world when they noticed that U.S. businesses tended to be “structurally” more profitable. “It begged the question of ‘why?,’” Konstantinos said.¶ After parsing through lots of data and speaking with experts, the veteran strategist discovered numerous reasons for the American economy’s unique strength, including flexible labor markets, robust capital markets, a culture for nurturing tech and innovation, vast natural resources, younger demographics than developed peers, the dollar’s status as the dominant reserve currency, and many more. But there were a few key long-term advantages that he singled out as being the most important because of their ability to drive productivity growth.¶ “Many countries have these various advantages, but none have the combination—or the entire package—quite like the U.S. does,” Konstantinos said. “I think of it as America’s ‘special sauce.’” ¶ Labor market flexibility¶ First, the U.S. labor market is “less encumbered by regulation” than developed peers, enabling companies to more readily increase or lower the size of the workforce to meet changing industry conditions. ¶ That might not always be great for workers, but it is good for the economy, according to Konstantinos. Flexible labor markets help U.S. corporations protect profits, increase productivity, and more readily respond to unexpected events like a pandemic or economic crash. ¶ Demographics ¶ Second, although headlines about America’s aging population are now common, the reality is that compared to other developed peers, the U.S. is doing well demographically. The median age of U.S. citizens is 38.5 years old, compared to 46.7 in Germany, 48.1 in Italy, and 40.7 in the U.K., and 49.5 in Japan. The U.S. also has higher immigration rates from countries with lower median ages on average.¶ “It’s true that regions like India, Brazil and Africa have much younger demographics, but compared to most of our current economic peers, we are doing pretty well,” Konstantinos said, noting that “a young, relatively upwardly mobile society tends to produce strong consumption, which helps fuel our economy.” ¶ A culture of innovation and robust capital markets¶ Third, as JPMorgan Chase CEO Jamie Dimon said in 2016, Americans have “innovation from the core of our bones,” and are willing to take on risks to start new businesses, enter new industries, and invest in themselves. ¶ While many have questioned whether the American Dream is still alive, immigrants worldwide also continue to flock to the U.S. for a better life and can have immense success when they get here. Look no further than the Taiwanese-American Nvidia co-founder Jensen Huang, or the South African-American Tesla CEO Elon Musk for evidence of this reality. ¶ Ignoring the slightly nationalistic rhetoric of Dimon, there are some structural factors that facilitate U.S. innovation, including the ease of starting new businesses in the U.S. compared to other developed nations; the quality of U.S. intellectual property protection; as well as significant government spending on research and development that benefits private enterprises. ¶ The U.S. is often considered a better place to do business when taking into account the more onerous regulations in Europe. In fact, it’s the sixth most business-friendly nation worldwide, according to the World Bank, while the U.K. is eighth on that list, Germany is 22nd, Canada is 23rd, Japan is 30th, and France is 33rd. A lack of patent protection in China has also led many companies to fear entering the country. China steals between $225 billion and $500 billion worth of IP annually, according to estimates from the cyber intelligence company CyFirma.¶ With big tech companies’ profits soaring, the U.S. is only increasing its research and development spending overall as well. “And that's paying off in more innovations and so on,” according to Yardeni.¶ “I think another point you might want to make is that the U.S. has the most developed and sophisticated capital markets in the world,” Yardeni added. “So the U.S. has the ability to provide a great deal of financing for all sorts of innovation and startups.”¶ The veteran investor noted that the U.S.’s giant investment banks, venture capital firms, and private credit lenders all boost innovation by providing equity and debt financing for new businesses, business expansions, and more.¶ The productivity edge¶ The factors listed above are critical to American exceptionalism in various ways, but Konstantinos said their main benefit could be their contribution to the U.S.’ productivity advantage and higher rate of corporate earnings growth. ¶ To his point, U.S. productivity, as measured by real GDP per hour worked, has surged compared to its developed peers for decades now, and that’s only accelerated since the pandemic.