Quick Bite: American Exceptionalism Revisited (Labour Productivity)

We’ve written countless times about American Exceptionalism – its share market performance, reserve currency status, unrivalled military and cultural power, technology giants, world-beating oil production, the list goes on. In this QB we’ll have a brief look at America’s labour productivity, yet another sphere where the US is over-achieving compared to its peers.

Source: MacroVisor

Labour productivity is key to US corporate earnings growth and GDP outperformance. Real GDP continues to grow faster in the US than in other developed markets, including Australia – which is exhibiting a sluggishness in growth few had anticipated.

Labour productivity in the US has grown at 1.7% since 2019. In the Euro area, it has only grown 0.2% over the same period. US GDP has expanded by 11.4% since 2019 and in its latest forecast, the International Monetary Fund (IMF) predicted US growth at 2.8% this year.

Source: Yardeni Research

While last month’s US election was fought against a backdrop of the cost of living crisis, the country’s economic performance in recent years has been the envy of the developed world.

The US has been less affected by the war in Ukraine than Europe, owing to its abundant domestic energy supplies, and rebounded more quickly than other G7 nations from COVID-19. Its share market beats all developed world rivals. Its mega-cap tech sector leads the world in innovation, and most recently, in Artificial Intelligence (AI). But its growth record is rooted in faster productivity growth, which the Financial Times describes as “a more enduring driver of economic performance”.

US labour productivity has grown by 30% since the 2008-09 Global Financial Crisis, more than three times the pace in the Eurozone and the UK. That productivity gap is reshaping the global economy. Economic growth in the Eurozone has been a third of the US since the pandemic, and output is set to expand by just 0.8% this year, according to the IMF.

Source: Claudia Sahm, Joseph Politano

Similarly, the economies of Japan and the UK have grown only by 3% over the past five years. Australia too seems stuck in a low growth rut at present, below the sick man of Europe i.e., Germany and also the UK. In fact, in productivity growth the US is rapidly outstripping almost all advanced economies, many of which are caught in a spiral of low growth, weakening living standards, strained public finances, and impaired geopolitical influence.

Productivity increases are enormously important. It is a measure of how efficiently resources are used in the economy – allowing workers to earn higher wages, expand company profitability, and augment tax revenues, ultimately boosting living standards.

Labour productivity is where the US has enjoyed remarkable success. In the three months to September 2024, according to official statistics, US output per hour worked was up by 8.9% from its pre-pandemic level, having expanded at annual rates between 2% and 2.8% over more than a year.

Source: US Bureau of Labor Statistics

Economists point to the US’s embrace of the latest technologies and innovation as being key to its outperformance. The US’s impressive strength in tech is the difference, Mario Draghi wrote, “If we exclude the tech sector, EU productivity growth over the past 20 years would be broadly at par with the US.”

Research and Development (R&D) spending is a good indicator of where countries are focusing. Most countries perform poorly when it comes to R&D spending, and there is also huge under-representation in fast-growing sectors. Globally, the top R&D spenders are increasingly concentrated in software and computer services, sectors that have overtaken pharma, tech hardware, and automobile manufacturing to become the leading destination for investment. It is dominated by US companies, mostly very large ones.

Leading countries by R&D expenditure worldwide in 2022 (in billion PPP US dollars)

Source: Statista

China is the only other large economy making significant strides in tech R&D spending. Xi Jinping’s government recently announced plans to make the country the “primary” centre for AI innovation by 2030. According to Organisation for Economic Co-operation and Development (OECD) data, the amount of venture capital invested in AI in China is now the second highest globally after the US.

Other advanced economies show little sign of this dynamism. According to data by Preqin, the US accounts for 83% of venture capital funding in G7 (Group of Seven is an intergovernmental political and economic forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) economies over the past decade. The US also attracted 14.6% of the world’s overall greenfield foreign direct investment (FDI) in the first 10 months of 2024 – a record high. Germany, by contrast, registered its lowest share of global FDI in 18 years.

Source: Yardeni Research