Let’s go back to summer of 2022. It wasn’t a matter of if a recession was coming, rather a matter of when.
From our July 7th, 2022 post, “Recession Obsession,”…
“Forecasting the next recession has become a national pastime. I’ve heard a recession is coming next week, month, the first quarter of 2023. Some say we are already in a recession.”
The narrative took on a life of its own. In my opinion, people like hot recession talk for three reasons…
- The economy and financial markets affect nearly everyone.
- People love a good trainwreck.
- People want to feel in control (we find comfort in knowing what happens next, even if the news isn’t great).
To be fair, there was plenty to worry about in 2022. In our October 2023 post, “The Recession that Never Came,” we highlighted the flashing red lights…
- Inverted yield curve
- Higher oil prices
- Higher borrowing costs
- Universal pessimism from most Americans
- Disjointed housing market
- Bank failures and rising bankruptcies
As time passed, the certain recession became less certain.
The narrative shifted to, “will we get a hard or soft landing?”
Now people are starting to realize, “maybe things aren’t so bad?”
Of course, there’s always going to be a segment of people that think the world is going to hell in a hand basket.
We could also get a recession in the future. Things can change quickly, and random events can come out of nowhere.
How is the U.S. economy so resilient?
Many point to liquid financial markets, energy production, functional judicial system, property rights, military might, government spending, mature economy etc.
These all have merit. I keep coming back to one unstoppable juggernaut…
The American corporation.
I will be the first to admit U.S. corporations do some shady things. I’ve been keen to point out Wall Street’s perpetual poor behavior (see “Fool me Once, Fool me a Billion Times.“).
Further, we often vilify American business as greedy, profit hungry monsters (some of the reputation is earned, see which corporations are the worst on Violation Tracker).
Here’s an open secret, every country is trying to create their own Silicon Valley and Wall Street. American businesses are the envy of the world. Our companies employ the best and brightest minds on planet Earth.
How did U.S. corporations help the economy avoid a recession?
The Most Valuable in the World
Source: Barron’s (2/15/2024)
The above graphic shows the top 10 largest companies in the world by market cap (size). Eight out of ten are U.S. companies, the exception being Saudi Aramco & Taiwan Semiconductor Manufacturing Co. (TSMC).
Corporate Profits
Source: St. Louis Fed, U.S. Bureau of Economic Analysis
The above chart shows corporate profits after tax (2014 – July 2023). COVID mucked up the business cycle and created many imbalances, however, corporate profits defied even the most optimistic expectations.
Part of corporate earnings resilience is that many companies are able to pass along higher input costs to consumers. This is one reason why stocks are traditionally a good inflation hedge (see “Worried About Inflation? You Might Own These Assets.“).
Of course, some bad corporate actors used inflation as air cover to price gouge, offer less for more (shrinkflation), and raise prices.
Borrowed Money at Rock Bottom Rates
Higher interest rates and borrowing costs received much attention the past 24 months. Hardly anyone was talking about how corporations borrowed money hand over fist during the period of record low interest rates.
Despite rising interest rates, companies were flush with cash and their cost of capital was unchanged.
According to a November 28, 2023 New York Times article, “Net interest payments paid by corporations are reaching 40-year lows. Corporate debt interest payments have steeply dropped off since the pandemic, with amounts reaching lows not seen since the 1980s.”
Once the debt matures and companies have to borrow at higher market rates, this tailwind could go away.
Adaptability
The pandemic changed how we worked. Gone were the days of sitting in gridlock traffic and being chained to a desk from 9 to 5. Companies retained and attracted talent by offering work from home & flexible work options.
The result is a healthier work/life balance, which often increases productivity and employee satisfaction.
Technology Leadership
Whether it’s MS-DOS, America Online/Netscape, iPhone, MySpace, or ChatGPT (AI), American innovation is often far ahead the rest of the world.
I covered this phenomenon in greater detail in Pure Portfolios’ February 2024 Market Commentary.
There are other not-so-obvious benefits from great businesses…
- When U.S. stocks go up in value people want to own them. According to Meb Faber, foreign ownership of U.S. stocks has only been higher once in the past 70 years. The U.S. stock market is arguably the greatest wealth creation the world has ever seen.
- Profitable businesses employ people. This fuels the purchasing power of the American consumer.
- Federal, state, and local governments benefit. Companies pay federal & state tax (although many hire MBAs and CPAs to find tax loopholes). Employees pay federal and state tax.
- When a person buys a U.S. stock, you are an owner of a business that makes stuff, and/or provides a service. If the company is good at making stuff and/or providing a service, it makes money. The shareholder has a claim on their ownership share of the profits.
- If you’re an investor and sell a stock at a gain (or take an RMD from an IRA that owns stocks), Uncle Sam gets a cut.
Do American companies do some shady stuff? Sure.
Does the government need to regulate and discipline bad actors? Yes.
Warts aside, in my opinion, American business is what makes the U.S. economy resilient and the envy of the world.