SUMMARY

• Despite naysayers, the US still demonstrates ‘Economic Exceptionalism’, in our view.
• ‘Economic Exceptionalism’ equates to strong economic growth, high productivity and global appetite for Treasuries.
• RiverFront remains overweight US securities relative to international ones in our portfolios.

If you listen only to America’s critics, you would be forgiven in assuming the US is losing its’ mojo as a world power. Pessimists point to a turn away from free trade, threats to Federal Reserve independence, a volatile geopolitical doctrine and US dollar weakness. As the narrative goes, foreign governments are losing interest in funding our massive deficit via Treasury purchases, and our economy, groaning under the weight of protectionist tariff policy and other challenges, is no longer ‘exceptional.’

Embedded in this narrative are some legitimate concerns…some of which we share and have recently written about. However, we’d like to push back on this broad narrative by highlighting where the US has ‘not lost the plot’ on the world’s stage; put simply, we believe the US remains the strongest, most anti-fragile large economy and corporate sector.

US Economy: Still the Most Resilient in the World

This assertion is well-supported by relative economic growth trends over the last decade. As can be seen in Chart 1 below, the US was not only growing faster than Europe or Japan heading into the 2020 pandemic, but it also dropped less during the pandemic AND rebounded more powerfully coming out of it.

On a more tactical basis, we pay close attention to Purchasing Manager Index (PMI) surveys as a useful monthly window into corporate trends in manufacturing and services. From this perspective, the US also remains the world’s healthiest developed economy. The August US Composite PMI registered 53.6 (Chart 1) – well into expansionary territory and higher than the Eurozone, Australia, Japan, or the UK. This helps explain why, according to the Atlanta Fed’s GDPNow tracker, US GDP growth year-over-year for the 3rd quarter is likely to be close to +4%, after surprising to the upside with 3.8% growth in Q2. One of our favorite real-time indicators of US consumer spending -US nominal retail sales – grew +5% y/y in August, above the two-year average rate.

While some scratch their head at the enviable resilience of the US economy, we don’t think it’s a mystery; rather, its’ the US’ structural productivity that continues to drive ‘American Economic Exceptionalism’ (AEE), in our view. Importantly, we believe AEE is not cyclical, but rather a structural factor that has been in place for decades and is likely to continue…regardless of cyclical swings in politics.

We believe America’s ‘special sauce’ is the confluence of a variety of factors, including a culture of innovation and entrepreneurship, intellectual property (IP) protection, deep capital markets, labor flexibility, and ‘reserve currency’ status for the dollar. These factors have existed under both political parties, and we believe will continue into the future – as long as the US continues to embrace business-friendly policies and investments in research and development.

In our view, AEE manifests itself in higher economic and corporate productivity in the US, versus regional peers in Europe and Asia. Recent data suggests US productivity continues to improve; non-financial corporate productivity (encompassing roughly half of US GDP – see Chart 2) surged +5.7% quarter-over-quarter in Q2, with output per hour rising +7% but hours worked up only 1.2%.

Foreign Investors Are Not Fleeing US Treasuries Yet

So far, the fear that foreign holders of US Treasury debt will flee en masse and cause interest rates (and thus the carrying cost of US debt) to break out to the upside does not seem to be holding up to scrutiny. In fact, foreign holdings of Treasuries totaled a record high $9.16 trillion for July, up $31.9 billion from June. While ‘official’ holdings appear to be stagnant since 2022, foreign ‘non-official’ holdings (i.e., private entities like corporations, banks, investment funds, and individual investors) have surged over the same time.

It is true that China’s Treasury holdings may actually be falling, as the holdings of their ‘phantom’ custodians in areas like Luxembourg were also down in July. However, this is likely related more to China’s exports to the US being sharply down versus a concerted effort to divest from Treasury holdings. All of this suggests US Treasuries still offer foreign holders an attractive blend of liquidity, currency hedging and a yield advantage relative to many other countries’ government securities.

In conclusion, we remain optimistic about the US’ structural economic advantages. This optimism is reflected across our portfolio allocations, as we remain overweight US stocks.