Hamish McRae: Don't write off the US economy

China and India may be growing faster but in technical innovation there's no contest
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The Independent Online

Americans may be glum about their political situation but they are becoming less so about their economic one. So much of the reporting from and within the US has focused on the discord in Washington that the wall of sound has obliterated the signals from the economic heartland. Such signals that have come through have been largely negative and have been reported though a political prism.

It makes a good headline to write that employment has failed to respond to the increase in output and it makes a good picture to show the decaying homes on abandoned developments. Such positive stories that have been around, of which the recovery in share prices is the most obvious, have almost made matters worse, for they suggest that the few on Wall Street are again benefiting from the tax dollars of the many on Main Street.

Dig a little deeper though and you can sense that American corporate self-confidence is returning: a sense of optimism, almost of swagger, that is quite absent from the prevailing mood in Europe and the UK. Quite suddenly, after all the despair, the fears of financial meltdown have evaporated. America, or at least Business America, is back. Why?

Well part of it is what has been happening in financial markets. Markets both reflect the prevailing mood and help shape it. If the financial services industry is making money then it becomes easier for the rest of industry, "real" industry you might say, to get investment funds, think of possible acquisitions and resume planning for the future. Six months ago it was still a question of survival. Now that is past.

The dollar has helped too, not in the sense that a strongish currency is good for business but rather that it shows that, whatever the problems of the US, at least the currency is not bowed down by the concerns that have been plaguing the euro and the pound. Rationally California may be in an even bigger financial mess than Greece and at some stage pretty soon the country will have to come forward with credible plans to tackle the Federal deficit. But for the moment at least the dollar remains a safe haven and in that sense carries the message that the US is a safe haven for global savings.

There have been other more specific examples of returning confidence. Take the automobile industry. Six months ago General Motors was desperate for Federal support and desperate to sell anything that could raise some cash. So it was negotiating with a buyer for its European subsidiary Opel, together with its UK arm Vauxhall. Now the new management feels sufficiently secure to say, hey, this is a good business and we don't need to sell it after all. Toyota, its largest rival, has by contrast been plagued by its poor quality control and the papers have been full of pictures of its chiefs hanging their heads in shame.

There is a broader point here. It is indeed true that this has so far been a jobless recovery for the States. Worse, all the jobs created in the last boom have netted out, disappeared. But the flip side of that is that American corporations have vastly increased their productivity. As demand returns they are increasing their output using the existing staff. What is bad for the labour market, for the millions of people seeking employment, is good for the corporate sector.

The country is beginning too to glimpse the possibility that it might no longer be so dependent on imported energy. American optimism has been fuelled, if that is the right word, by the technical advances that may make it possible to exploit the massive oil and gas reserves trapped in shale and tar sands at a commercial cost. It is hard to see the US once again becoming self-sufficient in oil but, add in Canadian reserves, and you could see North America as a whole regaining that position.

There is also an appreciation, always there but maybe pushed to the back of people's minds, that the US is still the main source of commercial and intellectual innovation in the world.

It has the best universities – the only other country with world-class universities is the UK and we are in danger of losing our edge as finances tighten. There have been suggestions that within another decade China may have developed institutions of similar merit. But for the time being there is clear water between the US and China on that front, at least. Besides, the best Chinese (and Indian) students still want to study in the US, with the UK as the principal alternative.

I think too that the row between Google and the Chinese authorities has led to a new appreciation of American innovative excellence. Google needs to be in China because that has more internet connections that anywhere else. But China needs Google in the sense that if it is to push forward intellectually it needs the access and direction that search engines bring. Besides, the innovative vigour of US entrepreneurs is undimmed. Look at the global impact of the iPhone, a technology where the US had been lagging. Look at Twitter.

The big point here is that the rest of the world looks to the US for innovation. The Chinese and Indian economies may be growing faster, actually much faster, but in terms of technical leadership there is no contest. The US is unquestionably the leader, now more than ever.

The "Noughties" were, on just about any measure, a pretty bad decade for the US. The country has entered the new decade in a fractious mood, a sharp contrast to the self-confidence, you might say the arrogance, of 10 years ago. On one measure, the size of the US economy relative to what is now becoming number two nation, China, this decade will see further slippage. That is inevitable. But, in a way, a nation that is aware it faces huge challenges is in a more robust position than one that assumes its position in the world is secure.

Whatever happens to American politics, the business community is picking itself up off the floor and is emerging stronger as a result of the battering it has taken. This will be another difficult decade for the US, but it will not be an easy one for anyone else. If the corporate community delivers, the US economy, relative at least to that of the UK and Europe, may do rather better than many people expect.

h.mcrae@independent.co.uk

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