Weekly Buzz: 💪 A big reason the US has stayed strong

5 minute read

While many expected higher interest rates to slow the US economy, it has shown remarkable resilience so far. The key to this strength? An unprecedented US$5 trillion in government spending over the past four years.

One big boost

The scale of this spending is staggering. To put things into perspective, the US$5 trillion in stimulus bills starting in 2020 represents roughly 20% of the US GDP in 2023 – percentage-wise, that’s four times more than what the country spent on its post-World War II rebuilding effort, the Marshall Plan.

This financial deluge was designed to buoy the economy, providing a safety net for households and businesses, boosting consumer spending, and fueling growth through investments in tech and clean energy.

Each dollar spent this way doesn’t simply add a dollar to the economy – it multiplies through the supply chain – adding new jobs, increasing incomes, and boosting household spending. This ripple effect has more than offset higher interest rates.

But this stimulus has come at a cost. It’s contributed to inflation staying sticky, intensified wage pressures, and ballooned US debt.

As an investor, what does this mean for me?

The US’s spending strategy appears to have paid off – its economy has stayed strong even as inflation cools – but the story is far from over. If the Federal Reserve moves too quickly to lower interest rates, it risks potentially reigniting inflation.

The past four years of spending help explain a resilient economy still grappling with sticky inflation. It also hints at tighter government spending ahead, and the possibility that elevated inflation may persist for longer.

While economic cycles can be influenced by policy decisions, they cannot be eliminated. It’s why we advocate staying invested with a diversified portfolio that’s built to handle them (yes, this includes our General Investing portfolios).

📰 In Other News: China’s pushing for growth

China has set its sights on "around 5%" economic growth for 2024, mirroring last year's target.  But that goal will be harder to hit this time around. Back in 2023, growth – which came in at 5.2% – was helped by a more favourable comparison to the year prior, one that was stifled by pandemic restrictions.

2024 did kick off strong for the country, with a surprising 5.3% year-over-year growth in Q1 that defied forecasts. But that momentum has slowed in Q2, with growth now dipping to 4.7%. This deceleration highlights the challenges China faces: a stubborn property slump and growing job insecurity, all of which are putting the brakes on domestic demand.

In response, Beijing is flexing its economic muscles, ramping up infrastructure spending and pouring resources into high-tech manufacturing. The central bank is also hinting at further monetary support, including potential cuts to interest rates and banks' reserve requirement ratios (our Simply Finance below breaks this down).

All eyes are now on this week's "Third Plenum" – a critical quinquennial (once every five years) meeting often heralding major economic policies that shift the country's trajectory.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Reserve requirement ratio (RRR)

The reserve requirement ratio is like a financial safety net for banks. It's the amount of money that banks are required to keep on hand, ensuring that they always have some cash available to meet customer withdrawals and maintain financial stability.

It's one of the key tools that central banks use to influence the economy – when the ratio is lowered, banks can lend out more money, stimulating economic activity.