CleverAdviser
Welcome to the Chart of the Week.
This week’s chart highlights government spending in the US as a percentage of GDP following the Second World War, and today.
A question we have been getting from clients is, why is the US economy so strong? The simple answer is, they have been spending more money.
Post World War II, the US put forward an aid package to help Europe, known as the Marshall Plan. The Marshall Plan, also known as the European Recovery Program (ERP), aimed to rehabilitate the economies of western and southern European countries. The plan provided financial aid to support rebuilding efforts on the continent, totalling more than $15 billion, which is equivalent to about $150 billion in today’s money. This benefited the US, as much of the money was used to buy raw materials and products from the US to rebuild Europe.
Fast forward to today, and the US is spending again, in a post-Covid world. However, the numbers are much bigger this time around. Around $20 trillion has been spent since Covid began.
Ultimately, spending boosts growth, which is one of the reasons why the US economy has been more resilient than expected in the face of high inflation and high interest rates.
This is why the US Federal Reserve is in no real hurry to reduce interest rates. Nevertheless, we still expect inflation to continue moderating, allowing central banks to begin cutting interest rates this year.
Given the strength in the economy, investors have changed their view on how many interest-rate cuts to expect this year. However, investors tend to swing quickly from being overly optimistic to being overly pessimistic about markets. Perhaps the same can be said for expectations around interest-rate cuts, as they have changed dramatically throughout the course of this year. Trying to forecast the exact moment is challenging; identifying the directional trend is much easier.
As we have written in our quarterly report (see link below), we believe interest rates will trend down, as growth moderates and inflation falls to target.
Takeaway: The trend is your friend.
Did you know: The inaugural Abu Dhabi Autonomous Racing League pitted a self-driving car against a Formula 1 driver. Click here.
Marlborough Podcast: This week, we discuss tech giants’ earnings reports, US inflation & GDP data. Click here.
Marlborough Commentary: In our quarterly commentary we cover market bubbles to the AI boom. Click here.
Marlborough Blog: Andrew Shaw, our Japanese analyst, unveils why we are overweight Japan. Click here.
