London – The American economy continues to baffle forecasters. Growth remains stubbornly resilient despite the highest interest rates in a generation. But seasoned observers on this side of the Atlantic see cracks beneath the veneer. They warn that the apparent strength is a mirage, sustained by unsustainable fiscal stimulus and a labour market that is tighter than a drum.
To understand the puzzle, look no further than the consumer. US households are still spending as if there is no tomorrow. But the savings rate has fallen to a historic low, suggesting that the party is being funded by credit card debt and dwindling pandemic-era savings. This is not a sign of health. It is a classic prelude to a correction.
The manufacturing sector is already flashing red. The ISM index has been contracting for months. Corporate bankruptcies are rising. And the commercial real estate market is a ticking time bomb, with office vacancy rates in cities like San Francisco and New York hitting levels not seen since the 1980s.
Meanwhile, the Federal Reserve finds itself in a bind. Inflation remains above target, but the labour market is cooling. If they cut rates too soon, they risk rekindling inflationary pressures. If they hold too long, they risk tipping the economy into recession. This is the central banker’s nightmare.
British analysts are particularly concerned about the complacency of global investors. They point to the US dollar, which remains overvalued by most metrics. A sudden reversal could trigger a currency crisis, especially if investors finally wake up to the scale of US government debt. At $34 trillion and rising, the debt-to-GDP ratio is approaching levels that have historically been associated with sovereign stress.
But perhaps the most worrying sign is the divergence between the US and the rest of the world. While Europe and China struggle with stagnant growth, the US appears to be an island of prosperity. This cannot last. The global economy is too interconnected. A slowdown in Asia will eventually hit US exports, while a recession in Europe will weigh on corporate earnings.
The question is not whether the US economy will stumble, but when. History teaches that the longer the expansion, the harder the fall. The fiscal stimulus of recent years has postponed the inevitable, but it has also magnified the imbalances. When the music stops, the hangover will be severe.
For now, the markets are betting on a soft landing. But as any seasoned City trader knows, the crowd is often wrong at key turning points. The wise money is hedging its bets, buying gold and shorting high-yield bonds. The bottom line is that the US economy is not defying the odds. It is simply taking longer than expected to succumb to them.
