The bull case for the US economy

There are no shortage of reasons to worry about the state of the world economy today. An unsustainable bubble in China, the possibility of sovereign debt defaults in Europe, the chance that debt ceiling politics will derail the US economic recovery… And I could go on. Like many of the writers on MacroBusiness, I am of a slightly bearish disposition. However, one thing I have always believed is that it is important to take note of evidence that is contrary to your view. Confirmation bias is a dangerous thing. So in this spirit, today I am going to take a look at the bull case for the US economy. In essence, while the medium term outlook may not be great, there are a few reasons to think that the second half of this year may be stronger than many expect.


OK, we already know the US jobs market is an absolute mess. But today we got a surprisingly strong employment report for June from ADP. From the Bloomberg report:

Companies in the U.S. added twice as many workers as forecast in June, signaling an improvement in the labor market that may help bolster the economy in the second half of the year.

The 157,000 increase followed a 36,000 gain the prior month, according to data from ADP Employer Services. The median forecast in a Bloomberg News survey called for an advance of 70,000.

Now, the ADP report has a slightly patchy record and one data point does not make a trend, but coupled with the strong ISM manufacturing report for May that came out last week, this data suggests that tomorrow’s official government report on employment could come in stronger than some expect.


Oil prices, which a couple of months ago were threatening to snuff out the weak economic recovery,  have fallen about 15-20% from their peaks in April. As Cullen Roche of Pragmatic Capitalism says (citing UniCredit):

At the end of last year, the US administration had hoped to kick-start flagging consumption through tax cuts. But the plan failed, as soaring commodity prices have in recent months absorbed not only the  tax cuts but the entire  increase in disposable incomes. Now, however, the tide appears to be turning. Energy prices have fallen strongly in recent weeks and might pull back even further. In addition, food prices have at least stabilized. That means that US households are now enjoying a (delayed) tax cut after all.

Of course, there is no guarantee that oil prices will stay lower in the second half of this year. After all, having released 30 million barrels of oil from its Strategic Petroleum Reserve last month, the US government has no more bullets in the chamber. Still, for now, consumers are getting a bit of relief at the pump in the form of lower gas prices.

Auto Production

Auto production fell sharply after the Japanese earthquake and tsunami earlier this year disrupted the supply chains of carmakers around the world. The chart below, which I put together with data from the Federal Reserve, shows the sudden fall in production in April/May, but as you can see from the red part of the line (which is based on the actual production schedules of US-based auto makers), we are going to see a big rebound in the third quarter of this year as supplies from the Japanese parts makers start flowing again. Granted, this too will probably just be a temporary boost, but it is one more reason to expect that growth in the second half of this year could be surprisingly strong.

That’s enough for today. It’s not easy being a bull.

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    • How about the trillions stolen in “bailouts” be given back, close down all the bankrupt winners and all the bankrupt people who borrowed more than they should have??? sounds bullish.
      any 1 left to hold up the bulls after that?

    • “If you want the private sector to create jobs, get the government off its back by reducing regulations and taxes.”
      You mean regulations like 5 day work-week and minimum wages?
      You might as well declare that you want US to become a third-world country.

      • “You mean regulations like 5 day work-week and minimum wages?”

        Abolishing minimum wages would be a good start.

        • Why don’t you instead move to a third world country and see the government regulation free labor market in action.

          Please do report back here on whether you like it or not.

          • Mav,

            Perhaps you mean the following third world countries that don’t have minimum wage laws:


            The following countries that do have such laws must be workers’ paradise:

            Democratic Republic of Congo
            Central African Republic
            Sierra Leone

          • Austria Denmark Germany Iceland Italy Liechtenstein Norway Sweden Switzerland”

            *shakes head* So you come up with a list of countries that are the cream of the welfare states and tax havens!!
            Are you saying these countries do not have labor market regulations and tax structure designed to protect and provide social safety nets to those at the bottom of the pyramid? Try setting up a sweat shop in one of these countries.

            “Democratic Republic of Congo
            Central African Republic
            Sierra Leone

            Now, why did you list countries that are free market utopias, where the government or the rule of law does not even exist or exists only on paper??

          • Mav,

            In your earlier post you implied that abolishing minimum wages will cause the US to become a third world country.

            I have shown you that is a false assumption.

          • I said/implied no such thing.


            “”Abolishing minimum wages would be a good start.”

            …you implied that abolishing minimum wages would be just the start of a rollback of government regulation of the labor market.

            So after minimum wages, whats next? 40 hour/5-day work-week?

          • These are your words:

            “You might as well declare that you want US to become a third-world country.”

            This implies that the statement “abolish minimum wages” is equivalent to “declare that the US become a third-world country.”

            Do you now deny that abolishing minimum wages will cause the US to become a third-world country?

            “…you implied that abolishing minimum wages would be just the start of a rollback of government regulation of the labor market.”

            No I didn’t ‘imply’ it. I meant it.

          • My exact words are :

            “You mean regulations like 5 day work-week and minimum wages? You might as well declare that you want US to become a third-world country.”

            I am sure others here will notice the plural and the word “like”, even as you do some selective quoting to imply that I meant only abolishing minimum wages would turn US into a third-world country

          • So you actually believe that rolling back labour market regulations will lead to the US becoming a third-world country?

      • Growth in regulations in the US is out of control:

        “The CPSC is an independent regulatory agency and therefore, technically, it is not required to follow the president’s executive orders such as the one Mr. Sunstein refers to mandating a “cost-effective approach to regulation.” In past administrations, the agency has always followed the lead of the Office of Information and Regulatory Affairs, which Mr. Sunstein heads, in such matters. However, under this administration, we have ignored the recent direction to look for and eliminate burdensome regulations. We are just too busy putting out new regulations.

        I have repeatedly requested that the agency do cost-benefit analysis on our various regulations only to have that request voted down by my fellow commissioners on a party-line basis. Consequently, we are issuing regulations without having done the necessary work to understand the impact of our actions both on those being regulated and on the public. As a result we have imposed regulatory burdens and caused people to lose their livelihoods without a real payback in terms of safety. At the CPSC, common sense regulation doesn’t even get a head-nod.”

        Nancy A. Nord
        Consumer Product Safety Commission

    • Sidelined — Those links don’t work unfortuntaely. FRED is a great resource for data though.

      As for your second point, the US already has the lowest taxes in the developed world. Taxes and regulation are not the reason that unemployment is so high now.

      • Weird. Try these links instead. Unfortunately I won’t know if they work until I actually post them. So here’s hoping!

        Real Compensation per hour:

        Unit Labour Costs:

        I don’t think the labour costs data are adjusted for inflation which is around 3.6%, so in real terms labour costs are falling.

        PS. FRED is truly brilliant. In the past I’ve tried getting employment data from the BLS, but gave up in frustration and disgust. FRED is way better.

          • Always nice to agree on something.

            BTW, do you have a source for “the US already has the lowest taxes in the developed world”?

            I don’t doubt that its true, but it would be nice to see for myself. By my calculations total US Govt revenues are around 36% of GDP. That’s probably lower than most European countries.

            In any case, even Keynesians would admit (I hope!) that raising taxes at this stage of the business cycle could be counter-productive.

            Additionally, some argue that its actually govt spending, rather than taxes, that is a drag on business confidence because it represents potential future tax increases (Ricardian Equivalence).

            Based on what you said in an earlier post, I suspect you don’t buy that, but I’m just putting it out there.

          • Montgomery Burns

            That’s strange because in October 2008 I do not recall business rejecting government spending on the grounds it would reduce confidence. Is it possible that government spending reduces confidence except when it goes to fund wall street bonuses?

            On Ricardian equivalence:


            about a 1/3 of the way down and beyond.

  1. Thanks RA – always goofd to get a different perspective/arguement. Nothing worse than a bunch of bloggers group masturbating over the same viewpoints.

  2. All I can say is:

    Job – 13 consecutive weeks of +400k initial claims.

    Oil – Got a head of itself.

    Autos – Channel stuffing.

    But agree with Q, be dull if this site was nothing more than a love in.

  3. I’m pretty optimistic about the US economy. The US has always had a great capacity for innovation and economic renewal. Importantly, the US economy is an environment where innovation and an export focus are richly rewarded. Ultimately, this will create great businesses — and entire new sectors — that will carry America forward into the 21st Century.

    Of course there are huge problems with the housing market, private and public debt, but its innovation that creates long term prosperity, and America has that in spades.

    I wish I could say the same for Australia.

    • Crocodile Chuck

      The US is the country most highly leveraged to infinite supplies of CHEAP liquid fuels. Those days are over. See Jeremy Grantham’s last quarterly newsletter-its a new paradigm……

      • Sobering read. The Hydrocarbon Revolution. Exhibit 4 (p6), a doozy. This is a lot to consider, the population issue is insoluble, the future prices of those listed commodities no longer expected to trend downwards…

        Am I reading it the wrong way? Iron Ore, for example, a 1 in 2,200,000 chance of being on a downward price trend?

        I’ll definitely read this again, when I have more time to digest.

        • Am I reading it the wrong way? Iron Ore, for example, a 1 in 2,200,000 chance of being on a downward price trend?

          Yeah, even Grantham says this makes no sense. Oil, incredibly rare and difficult to extract, is more likely to fall in price than iron ore, which is abundant in the Earth’s crust.

          Make up your own mind.

          • Yes, even Grantham says it mays no sense – but then later says that it is a paradigm shift in commodity prices/trends – as I said, have given a cursory look and will read in depth later.


            ‘I believe that we are in the midst of one of the giant inflection points in economic history’

            ‘From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.’

            ‘If you believe that commodities are indeed on their old 100-year downward trend, then their current pricing is collectively vastly improbable. It is far more likely that for most commodities the trend has changed, just as it did for oil back in 1974, as we’ll see later’

          • Montgomery Burns

            That’s not quite what he is saying actually. His “statistics” (which look poor to me but a discussion of which would last quite a while) are reflecting (attempting to reflect) the breaking of so-called long term downward trends in a given commodity e.g.

            “It has a 1 in 2.2 million chance that it is still on its original declining price trend”

            It is not a statement about whether oil is more likely to fall in price than iron from here.

          • Fanboy, I’m a rusted-on peak oil doomer. Don’t get me wrong, I’m much more in the Ehrlich camp than the Simon camp. But if I was to nominate one metal ore that’s unlikely to be in short supply for a very long time its iron ore. And if I was to nominate one fossil fuel that we have more than enough of (too much even) it would be coal.

            These two plentiful minerals just happen to be what Australia’s mining boom is built on, which makes us much more vulnerable to downside demand shocks.

            Heck, if Australia was blessed with a lot of oil instead of iron ore and coal, I’d probably be a mining boom cheerleader, because the oil supply situation will always be tight, even through the deepest darkest recession.

      • The US is also the place where a lot of the solutions will be invented. e.g. Tesla Motors.

        We won’t invent anything in Australia, except better ways to dig up dirt.

        • Don’t forget CSIRO hold several patents on WiFi and gets a steady stream of royalties payments from many tech companies.

          But then, CSIRO is a government organization – that alone would disqualify it from being considered by the free marketeers 🙂

          • > Don’t forget CSIRO hold several
            > patents on WiFi and gets a
            > steady stream of royalties
            > payments from many tech
            > companies.

            If you mean the chipset manufacturer Radiata it was sold to Cisco who some 3 years later pulled the plug on it. There are many inventions made in Australia and then sold overseas for peanuts. We then import products based on our inventions paying hundreds of millions of $s. Our inability to create long term high tech industries is amazing. It looks like we are doomed to dig holes forever.

            Sorry for the off topic rant.

          • Honestly JPK, I saw a documentary highlighting this very thing – Years Ago.

            This is a great country stymied by short term vision. If we don’t see the payoff in 2-5 tops, we’re not there, as a rule. Truly, I have seen this too many times.

            People can’t even muster the future vision in light of our remarkable resource legacy – want to shoot it down at every opportunity.

            We are schmucks – if we don’t benefit from it, others likely will.

          • And JPK, to work in R&D in Australia gets a bit depressing at times – wider society does not seem to understand that somewhere in the world there are people who actually invent things.

          • Fanboy: Your “vision” is to hollow out what’s left of innovative exporters to “make room” for the glorious mining boom. I’m not sure how that helps!

            Chris: 95% of my businesses costs are R&D. I know what you mean. Bloody depressing. My suggestion: Get yourself a shovel, or invite Santos over to drill your back yard for CSG.

    • Lorax, the US economy used to be a place where innovation was rewarded. However it is becoming progressive less so under both recent Republican and Democrat governments.

      I have great faith in the US people to find solutions, but IMO one of those has to be to listen to their forefathers and rid themselves of their current system of government first.

      They wont get anywhere as long as they have clowns in congress who waste money on unproductive ventures while de-funding anything that helps the US (ie they are considering de-funding the James Web Space telescope…thats not the US of old).

  4. “However, one thing I have always believed is that it is important to take note of evidence that is contrary to your view. Confirmation bias is a dangerous thing”

    Well said Rotten Apple. Completely agree.

    Of course, if the US actually does bounce back to a path of strong, sustained economic and jobs growth under austerity (whether it is deliberate spending cuts or an arbitrarily imposed debt ceiling), I might have to reconsider if my understanding of basic macroeconomic fact is correct. Perhaps demand really is only weak because Americans fear tax increases to pay for increased government spending.

    At this stage, I doubt it though.

      • On that, Ed Harrison sees compatibility between the Austrian school of thought and MMT:

        “Just as Samuelson united mainstream economics in the neoclassical synthesis, I believe Modern Monetary Theory and Austrian Economics have underpinnings which can be united. First and foremost, it is about the build up of credit, leading to an unstable and crisis-ridden period. The point is that if you strip away the politics and ideology and look at the economics, MMT and Austrian economics are not incompatible.

        And because the neoclassical tradition has proved inadequate in addressing this crisis, I believe we should look ever more to these two schools of thoughts for a framework to develop solutions.”

        I did notice as I was investigating MMT that Austrians often made the same arguments as the MMTer’s – they just proposed very different solutions, with the Austians being fixated of free-market ideolouges while most MMT proponents are basically socialists.

        • Montgomery Burns

          I suppose we need to distinguish “austrians”, i.e. the economists, from “austrians”, i.e their acolytes.

          The big barrier for them (the economists) is understanding and accepting how the monetary system currently works. Dialogue with the acolytes doesn’t seem possible. MMT is empirical.

          There are some videos on the interweb from some conference, maybe last year (?), which probably goes back to when Harrison was first engaging with these guys. Worth viewing if you can find them.

  5. True, we’ve seen “green shoots” emerge since the GFC, only to have them wither again.

  6. The irony of all this discussion re: a bull case for the US economy is that we have already seen one of the strongest and fastest cyclical bulls in the SPX 500, so far already up over 100% since its March 2009 lows. A stellar performance in any asset class over such a period. Clearly this is a stealth rally that only the smart money participated in.

  7. so much for the bull case

    “Stunner: NFP Up Just 18K, Unemployment Rate 9.2%, Household Survey Down 445,000, Birth Death +131,000”

    I am afraid that for as long as the Fed and banking cleptocracy run the show there will be no bull case for the US. The most likely outcome seems to be more of the same i.e. ups and downs separated by government and Fed interventions.

    • Of course the one day in my blogging career that I decide to write something bullish I end up with egg on my face. Such is the plight of the econ blogger!