‘The United States of America, right now, has the strongest, most durable economy in the world.” So said Barack Obama last week, in his final State of the Union address. With elections this coming November, this two-term president is now in his last year in office. So what is Obama’s economic legacy? And just how strong is the US economy today?
Obama entered the White House in January 2009, in the midst of America’s worst financial crisis in decades. As his presidency starts to draw to a close, the economic storm clouds are gathering once more. The US stock market, like its British, European and Chinese counterparts, has endured some stomach-churning drops so far this year. The latest was on Friday, when the Dow Jones Industrial Average, having rallied the day before, plunged 300 points soon after opening, on a slew of bad economic data.
On the surface, as James Dimon said last week, the US economy “still looks OK”. The boss of JP Morgan Chase cited average GDP growth of 2pc to 2.5pc over the last five years and strong job creation. “Obviously it’s going to get worse, though,” he added, almost as an afterthought. It appears, after years of soaring stock prices, that even the tub-thumping titans of Wall Street are now losing faith in the biggest economy on earth.
America’s mighty consumers are curbing their spending, despite months of falling oil prices helping to cut the cost of motoring and heating their homes. Retail sales fell 0.1pc in December, we learnt at the end of last week, as Department of Commerce data showed sales up just 2.1pc during 2015 as a whole, the weakest increase in six years.
Consumption, of course, is a key driver of the US economy. Accounting for over two thirds of GDP, it has helped the economy to keep growing in recent quarters, despite the impact of a stronger dollar on US exports.
Industrial production, meanwhile, was down 0.4pc in December, having dropped 0.9pc the month before, according to the Federal Reserve. Over the fourth quarter as a whole, this vital indicator fell at an annual rate of no less than 3.4pc.
The US manufacturing sector is now officially in recession, with the ISM manufacturing index dropping to 48.2 in December, pointing to a countrywide contraction. The bellwether New York manufacturing index, released on Friday, showed activity plunging more sharply than at any time since 2009 – the epicentre of the financial crisis. The survey’s “new orders” index, highlighting the outlook for the next six months, also hit a seven-year low.
It’s clear that some of the reasons the US economy is suffering can be found elsewhere. The Chinese slowdown and the failure of so-called Abenomics to boost the Japanese economy, together with the ongoing malaise of the eurozone, have all contributed to sluggish growth in the States.
Having said that, the US is far less trade dependent that almost any other major economy. While exports amounted to 42pc of GDP in Germany in 2014, 28pc in the UK and 23pc in India, goods and services sold abroad accounted for just 13pc of US national income.
American commentators relentlessly push a “China-led slowdown” narrative, but the reality is that the US is a relatively insulated economy. Yes – Chinese equities have fallen sharply in recent months, yet the Shanghai Composite Index of leading stocks remains 40pc up on its level just 18 months ago. This is a home-grown US slowdown, much as it pains America to admit it.
As they start to fashion his economic legacy, though, Obama’s speechwriters have some decent material to work with. During his time in office, unemployment has fallen from a high of 10pc in October 2009 to 5pc today. Obama’s Affordable Care Act, however divisive, has also lowered the share of Americans without health insurance to 10.4pc, down from 16.2pc when he took office.
Having said that, the president’s so-called “employment miracle”, which has seen the creation of 5.6m jobs over the last 24 months alone, isn’t all that it seems. Characterised by a great deal of temporary and low-wage hiring, low labour force participation and almost no nominal wage growth at all, it has left much of the US labour force more insecure and poorer than it was when Obama took office. That’s a big reason why consumption has grown far less than the headline rate of job formation – a trend borne out in the weak figures released last Friday.
Perhaps the most telling criticism of Obama’s economic policy, though, is one that can be directed at most large Western economies since 2009. Sustainable economic recovery remains elusive despite massive economic stimulus – and that stimulus itself could yet turn out to be deeply counter-productive.
On the fiscal side, despite his State of the Union talk about “controlling deficits”, Obama has overseen the biggest Keynesian boost in America’s peacetime history. National debt has ballooned since 2009, from $9,000bn (£6,300bn) to $17,000bn.
Perhaps America, with its massive Treasury-bill market, and reserve currency status, can handle that. Perhaps it can’t. At the very least, in an increasingly competitive world, Obama leaves America’s children and grandchildren with far more government debt to service than when he took office.
It’s on the monetary side, though, where the stimulus has been the biggest – and, maybe, the most damaging. Since Obama took office, the Fed has expanded its balance sheet from around $1,000bn to $4,500bn – the result of so-called quantitative easing. Such easy money has pleased Wall Street, of course, acting as an on-going back door bank-bail-out while driving up stock prices too.
As a result of QE, corrections on US equity markets since the 2009 low have tended to be less than 10pc and pretty short-lived, acting as preludes to yet another sharp increase. Money-printing, then, has created a series of financial bubbles – not least in US stocks. At some point, bubbles burst. It appears increasingly, as investors get more agitated and brokers’ notes start screaming “sell”, such a moment could be approaching.
There’s always a catalyst and, rather than China, the catalyst could be oil. More than anything else, it’s the collapse of crude, down 70pc over the last 18 months and 20pc since the turn of the year, which has spooked financial markets. Cheap oil has seen a variety of assets hammered – from commodity currencies to mining stocks – as investors fret about the health of the global economy.
It has also led to big questions about the US corporate debt market – particularly the massive “junk bond” sector, dominated as it is by struggling energy companies. Cheap oil should boost a massive energy importer like America. Crude’s rapid plunge, instead, has cast a financial shadow over the broader economy.
The big problem US policymakers now have is one of credibility. Just a month ago, the Fed raised interest rates for the first time since 2006.
While making the quarter-point increase, America’s central bank cited factors including “economic momentum”, “solid gains in household spending” and “a strengthening economic recovery”. Do those conditions still hold? Did they even hold for much of the last quarter?
There’s now a real danger that, far from raising rates “several times” in 2016, as official guidance would have it, the Fed can’t raise further at all. It could even be, if this market storm gets serious and recession ensues, that the Fed’s next move is down.
Were that to happen, a rebellion by stock investors could quickly spread to bonds. Having entered the White House during a crisis, Obama could yet leave amidst a crisis too.