The writer is co-founder of Centerview Partners
The US economy is slowing down. The main dispute among economists is whether we will see a soft landing or a hard landing, and the pessimistic outlook dominated the headlines.
But while it is clear that we expect a difficult period, there are also reasons to believe that the American economy is ready for a new period of expansion in the years to come. Most observers tend to view today’s economic challenges through the prism of past recessions. But the US economy works differently today than it did 40 or even 14 years ago.
For starters, the private sector has become more innovative, agile and proactive in managing change and uncertainty. Think back to March 2020, when the pandemic brought world trade to a near complete halt. With the data, tools and strategies now available to business leaders, instead of economic Armageddon, we have embarked on a period of robust growth. (Government policy, of course, played a key role here.)
Leaders were quick to revise business practices to continue operations. Balance sheets have been strengthened, remote work has been permitted, new technologies have been adopted. In the most agile companies, capital investments have increased in order to strengthen competitive positioning.
The US labor market is also in better shape today than at the start of past recessions. The good employment figures for June underline this. While hiring freezes and layoffs are likely to cause economic hardship for many, workers today can find new job opportunities easier and faster with flexible work-from-home options. According to research by real estate group CBRE released last year, nearly 90% of the largest U.S. employers plan to continue offering hybrid work policies in the future.
Today’s economy is also more dynamic and entrepreneurial. Yes, tech valuations have fallen as they have been analyzed more rationally. But in the five years ending in 2021, new business creation was a third higher than the previous five-year period.
And we’ve learned in the decade since the recession that followed the financial crisis that economic models don’t take into account intangibles such as a company’s willingness to continue strategic capital investments during an economic downturn. . As companies reported earnings in the second quarter of this year, many business leaders embraced a proactive tightening of operating expenses, but maintained high levels of capital investment. To do otherwise, they know, undermines long-term growth.
Finally, the outlook for the economy is supported by government policy. The bipartisan infrastructure plan will provide more than $100 billion in infrastructure investment over each of the next five years. The landmark Inflation Reduction Act, narrowly passed last weekend, will help ease inflationary pressures. The US banking system is stable and sound. In the wake of persistent supply shocks, manufacturers are proceeding with onshore production and building duplication into supply chains. And while interest rates are rising, they are starting from an all time low – 0.25%, 95% lower than the average starting rate of the previous four rounds of rate hikes by the US Federal Reserve.
To be sure, there are risks, ranging from geopolitical instability to growing polarization, that could hamper government effectiveness and, in turn, hurt business confidence. But the United States is better positioned for growth than the current economic debate concedes. Look beyond the immediate economic clouds on the horizon – and consider the agile private sector, evolved and improved labor markets and the culture of innovation and entrepreneurship – and long-term forecasts may even look sunny.