US economy flexes muscles after strong final Q2 GDP growth of 3.0%

While everyone is clamouring over whether to buy Chinese equities because the PBOC and Chinese politburo have decided to release some stimulus, the US is just chugging along, making the most innovative companies in the world and cementing the S&P’s predicted earnings growth of 15% for 2025. Mario Draghi once said TINA (there is no alternative), and in this paradigm, there is no alternative to the US for investing your money. The correlation between corporate earnings and S&P returns is so strong, and with GDP growth as it is, it’s hard to argue this will slip any time soon. Employment is hardly going to slip in this scenario, and if it’s positive into January, Biden will set a new record for consecutive months of positive employment. Do not doubt the US bull. Everyone that has, has felt the wrath of freedom.

I find myself increasingly taking any statistics coming out of the US with a large dose of scepticism. It begs the question, if the US economy is supposedly so strong, why is there a need to cut interest rates and risk reigniting the inflation bonfire? After all, the Fed was quite clear that rate cuts wouldn't happen until inflation settled back at the sustainable 2% level. Inflation has hovered between 2.5% and 3% for the last six months, yet here we are with more contradictory rhetoric from the Fed. Meanwhile, consumer spending remains high, but it's being propped up by credit card spending, as debt and defaults hit record levels. So, it could be the case that the supposedly data-driven Fed is cutting interest rates not out of economic strength, but perhaps a little panic around labour market conditions. After all, nothing says 'confidence' like putting out a fire with gasoline.

The US economy continues to defy gravity, maintaining a robust 3% annualised growth rate in Q2 2024, however this resilience may be masking underlying vulnerabilities. Despite headwinds, consumer spending remained strong, albeit slightly lower than the initial projections. Yet, signs of potential weakness are on the horizon, with consumer confidence declining in recent months. Furthermore, the revision to business investment paints a more cautious picture, with the final estimate showing a fall from preliminary estimates. This suggests that businesses may be cautious about future economic conditions, impacting investment in the coming quarters. These latest GDP figures are likely to positively impact the US dollar in the short term, with continued economic strength leading to a more gradual easing cycle than currently projected. While the US economy has demonstrated remarkable resilience, potential storm clouds are gathering on the economic horizon, so investors should remain vigilant.

The US economy is demonstrating remarkable resilience, with consumer spending driving stronger-than-expected GDP growth. This robust performance, particularly in real consumer spending — surpassing levels seen in Q1'24 and Q2 of last year — may give the Fed pause in its rate-cutting considerations.

While the consumer remains a powerhouse, there are clouds on the horizon. Consumer confidence dipping as we enter Q4 could signal potential headwinds, and credit card debt is continuing to rise higher as have arrears. However, the labour market shows signs of stability rather than deterioration, with jobless claims moderating instead of climbing.

As such, this dichotomy between current strength and future uncertainty presents a complex picture for policymakers. Nonetheless, the Fed might still want to reconsider the pace of monetary easing, as two 50bps cuts at their next two meetings could very well trigger a resurgence in inflation.

It's clear that the same economic doom and gloom isn't felt in the US as it is in the UK. Regardless of the outcome of the election and the pain felt by rate hikes, it appears to be business as usual. Should the Fed cut their rates by another 50 bps points in November, the economic growth between the US and UK could widen even further.