'Solo Boom' US Economy Mystery, Why?...5 Reasons [Why&Next]

U.S. Annual Economic Growth Rate Forecast at 2.7%, Highest Among Advanced Countries
① Productivity Improvement Through Advanced Innovation
② Low Unemployment + Increased Immigration
③ Consumption Based on $1 Trillion Excess Savings
④ Investment Expansion via Corporate Attraction Through IRA
⑤ Increased Bond and Deposit Income Due to High Interest Rates

Amid concerns of economic recession in most countries worldwide due to prolonged high interest rates and high inflation, the U.S. economy is instead enjoying a boom, attracting global attention. Experts cite productivity improvements, strong employment, and robust consumption as the key factors behind the U.S. economic boom.

The International Monetary Fund (IMF) raised its forecast for U.S. economic growth this year by 0.6 percentage points from 2.1% to 2.7% in its World Economic Outlook released on the 16th. The growth forecast for the Euro area this year was 0.8%, Japan 0.9%, France 0.7%, Germany 0.2%, and South Korea 2.3%. Among major advanced economies, no country had a higher growth forecast than the U.S. France and Germany’s growth forecasts were also revised downward by 0.3 percentage points each compared to the January forecast.

Productivity Improvement: The Top Contributor to the U.S. Economic Boom

Experts point to productivity improvement as the strongest driver of U.S. economic growth. The U.S. Bureau of Labor Statistics announced that nonfarm labor productivity in the U.S. rose by 3.2% (annualized) in the fourth quarter of last year compared to the same period the previous year. U.S. labor productivity has been on the rise for three consecutive quarters. According to the Organisation for Economic Co-operation and Development (OECD), as of 2022, U.S. hourly labor productivity was $87.6, significantly higher than South Korea’s $49.4. It was also above the average of $64.7 among 38 member countries.

Productivity is an indicator of how much good output is obtained from the same input of resources. Innovations in advanced technologies led by artificial intelligence (AI) and an increase in skilled immigrants have boosted U.S. productivity.

The Bank of Korea analyzed in its BOK Issue Note published in February that the U.S. continues productivity innovation through technological innovation and attracting highly skilled talent. Kim Minsu, head of the U.S. and European Economy Team at the Bank of Korea’s Research Department, stated, "The U.S. has a developed capital market for startups such as venture capital, enabling innovation in advanced technology fields like AI and autonomous driving, and the increase in highly skilled immigrants contributes to productivity improvement."

Pierre-Olivier Gourinchas, IMF Chief Economist, explained last week during the economic outlook release, "The strong economic growth in the U.S. reflects robust productivity improvements, increased labor supply, and strong demand pressures."

Strong Labor Market and Consumption Also Underpin the Economic Boom

The improvement in the U.S. labor market is also a factor supporting economic growth. The U.S. unemployment rate last month was 3.8%, effectively at full employment. The U.S. has maintained an unemployment rate below 4% for two consecutive years, the longest period in the past 50 years. An unprecedentedly strong labor market continues.

The Phillips curve theory, which posits an inverse relationship between inflation and unemployment, does not currently apply to the U.S. economy. Despite an unusually low unemployment rate, inflation has decreased compared to last year. Julie Su, Acting U.S. Secretary of Labor, described the U.S. as the "strongest economy in the world" in a CNN interview following the unemployment rate announcement on the 5th.

The tight U.S. labor market is partly due to an increase in immigrants. It is continuously noted that immigrants support the U.S. labor market. The Congressional Budget Office (CBO) predicted that the U.S. labor force would increase by 1.7 million more than expected this year due to increased immigrant inflows. Immigrants taking low-wage jobs have lowered wage and inflation pressures, contributing to the economic boom. The CBO estimates that the high immigration rate in the U.S. could add 0.2 percentage points annually to the country’s gross domestic product (GDP) growth rate over the next decade.

As the labor market strengthens, consumption has also improved. U.S. retail sales last month increased by 0.7% compared to the previous month, significantly exceeding the market expectation of 0.3%. The U.S. is a consumption powerhouse, with consumption accounting for nearly 70% of GDP. The more consumption increases, the more the economy grows.

The robust U.S. consumption is largely attributed to the astronomical government support payments distributed to citizens during the COVID-19 pandemic. According to the Bank of Korea, it is estimated that about $1 trillion of excess savings in the U.S. from the second half of 2021 through the end of last year was spent on consumption. The COVID-19 support payments led to excess household savings, which have continued to fuel consumer revenge spending.

Samsung Electronics Texas Austin Factory.
[Photo by Samsung Electronics]

U.S. Government’s Corporate Attraction Policies Also Fuel the Boom

The U.S. government’s American First policy, which attracted global companies’ production facilities to the country, has also been a foundation for the economic boom. The U.S. has made it practically difficult for companies to operate without building manufacturing plants domestically through large-scale semiconductor subsidies and the Inflation Reduction Act (IRA). As a result, major South Korean companies such as Samsung, Hyundai Motor, LG, and SK have significantly increased their investments in the U.S. This has greatly helped activate investment and employment within the U.S.

Kim Jeongsik, Professor Emeritus of Economics at Yonsei University, said, "The U.S. government has revitalized the U.S. economy through policies that encourage global companies to produce and sell semiconductors and automobiles locally. Companies have increased investments, and the government has expanded fiscal spending to boost economic growth."

Recently, a somewhat paradoxical claim has emerged that high interest rates are driving the U.S. economic boom. Bloomberg recently reported that the hypothesis that the recent base rate hikes triggered the boom is gaining credibility. It is basic economic knowledge that high interest rates reduce investment and consumption, lowering economic growth rates, but this claim reverses that. As interest rates surged, Americans earned more from bonds and deposits, leading to increased consumption.

David Einhorn, Chairman of Greenlight Capital, said, "Due to high interest rates, U.S. households are earning $400 billion annually from assets totaling $13 trillion. Lowering interest rates could actually slow down the economy."