Wall Street to Main Street: Sturdy U.S. Economy Keeps Chugging Along

“When you increase productivity, economies become better—local economies become better, society becomes better.”—Jensen Huang, CEO, NVIDIA.

As this column was drafted, most U.S. market indexes were hitting all-time highs in the wake of the U.S. Federal Reserve’s first interest rate cut in more than four years. Investors are choosing to agree with the Central Bank’s framing of the unexpectedly large inaugural cut as a method to ensure continued growth rather than as an antidote for sluggishness.

Hopes are high on both Wall Street and Main Street that the tone is set for solid business activity in coming quarters, boosting the odds for above-average earnings and GDP growth. We have long believed that the economy had more underlying strength than it was given credit for and believe so even more strongly today.

While headlines have been focused on the Fed’s move, a variety of underlying fundamentals have positioned the U.S. economy well, allowing it to avoid the recession that most pundits have been predicting for the past two years. Core components of this sturdiness include corporate resilience into, through, and after pandemic shifts in end-user demand, persistent consumer spending, and increasingly diversified sources of growth and operating capital for companies all up and down the size curve. 

It is vital to recall that the challenges that businesses have faced since the start of the decade—pandemic, supply chain disruptions, two hot ground wars—were more an unfortunate series of one-off events than a global conflagration of financial issues that caused a structural bubble in one segment or another (dot.com stocks in the 1990s, housing in the mid-2000s).

Corporate America in particular did a masterful job of quickly adapting both sides of its balance sheet, focusing on building sustainable, scalable, and profitable revenue. In aggregate, financial planning and analysis units and C-suites have been adept at adapting to swings at the macro level to keep functioning at the micro level. It’s a trend that remains largely unremarked amid breathless financial media, which often prefer to sow disheartening headlines.

A shift in government philosophy in favor of a focused industrial policy has also helped with more than $1 trillion in legislative allocation lined up via the Infrastructure Investment & Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act to rebuild and enhance infrastructure, reshore manufacturing, and focus on reviving core industries, like semiconductors, batteries, sustainable energy, and others considered important to national well-being. Interestingly, it is estimated that less than 20% of the federal funds allocated have been spent to date. The process of application, approval, local project permitting, and the raising of matching funds takes time. Given the multitude of announcements, a substantial increase in local and state bonding referendums on this year’s election ballots, and improving financing costs, we expect to see an acceleration of such projects into 2025 and beyond, setting a solid floor underneath potential economic activity. 

Another factor lending to our confidence in America’s dynamism relates to the significant advances in the implementation of core technologies, such as the transition to cloud-based processing, machine learning, and the building of use cases for the application of artificial intelligence. Basic analysis of legal contracts, in-the-moment adjustment of supply chain and navigational routes, and drug discovery are in rapid upheaval and rethink. 

The combination of all these factors has led to an uptick in aggregate U.S. productivity as shown in the chart from the U.S. Bureau of Labor Statistics. The U.S. Bureau of Labor Statistics noted that nonfarm productivity increased by 2.5% in the most recent quarter (June 2024)—far outpacing the post-WWII average and substantially above recent run rates.

Productivity can be viewed as how efficiently the country is converting worker labor into output and helps tee up a solid foundation for continued economic progress. As noted by BMO Economics’ Chief Economist Douglas Porter, U.S. productivity growth has averaged 1.9% a year in the five years ended June 2024, a far cry from Canada’s negative productivity growth over the same time, which has raised alarm bells in America’s neighbor to the North. 

The angst-ridden 2024 U.S. election cycle has contained much hand-wringing over how purportedly poorly the country is doing. Mudslinging, of course, is not unique to this election cycle but is a hallmark of most if not all. With that said, the core message of negativity has obscured an important thread of underlying resiliency that we believe deserves notice. 

Carol Schleif is chief investment officer at BMO Family Office. “BMO Family Office” and “BMO Wealth Management” are brand names used by BMO Bank N.A., BMO Family Office, LLC, and certain affiliates providing investment, investment advisory, trust, banking, and securities products and services. These entities are all affiliates and owned by BMO Financial Corp., a wholly-owned subsidiary of the Bank of Montreal (BMO). Investment products are not FDIC insured, not bank guaranteed, not a deposit, and may lose value. To learn more, visit www.bmofamilyoffice.com. Views and opinions expressed are Schleif’s and do not necessarily reflect the views and opinions of BMO.