I was reviewing Thursday’s Z.1 release from the Federal Reserve and all I could think to myself was “man, this is all so boring.”Boring is good in economic terms. It means there are no outlier sectors doing weird stuff that can create future instability. But this is all part of a broader theme that I’ve talked about regularly here – the US economy is becoming increasingly stable.¹
Now, I know what you’re thinking – “Cullen, we’ve had two stock market busts and a financial crisis in the last 20 years!” This is true. But it’s important to remember that the financial markets aren’t the economy and the data underlying the economy shows that this economy has been incredibly stable even with the Nasdaq bust and the financial crisis:
In the era of “new normal” and “secular stagnation” narratives almost no one is talking about how stable the US economy is. Yes, we’re growing more slowly than we have in the past, but we’re doing so with increasingly stability. This is the portfolio management equivalent of generating lower but more stable returns. In other words, it’s as if the US economy is doing better by growing more slowly but with greater stability.
But what could be causing this? I have a few ideas:
1. The US economy has become much more diverse. The US economy has become much more diverse over time which has reduced its dependency in any specific industry. Here’s a look at how the USA used to be a mostly manufacturing economy and has transitioned into a highly diverse economy that isn’t dominated by any single industry:
2. The Government plays a bigger role than ever. While the Federal Government has become a smaller part of the overall economy our state and local governments are significantly larger. This has likely contributed to slower growth, but has also added stability to jobs and income over time as government jobs tend to be more recession proof than private industry jobs. Overall, this has acted as a greater safety net to the aggregate economy.