Is the US exceptional? The narrative in markets and economics towards the end of last year was clear; the US is the strongest large economy, and it is only getting stronger. On the surface this looked true. The US stock market, buoyed by the Magnificent 7 tech megacap stocks, had far outperformed all others over the past two years. US per capita gross domestic product (GDP) had outgrown any of its G7 peers. Even China, while still posting higher GDP growth numbers, was slowing from its structural economic imbalances.
And seemingly the future for the US only looked brighter. Leading the race to dominate AI and crypto, which we were told were the key technologies of the future, the US’ advantage in global economic and political domination looked unassailable. Asset managers when asked on their positioning were almost all “overweight” America.
Yet the first few months of 2025 have not panned out as expected. First, US stock market performance has been tepid, to say the least. European stocks have never left US markets this far behind at the start of a year. The Stoxx Europe 600 leads the US benchmark S&P 500 Index by about 4% in dollar terms. That’s slightly more than the previous record set in 2006 and only the 10th time it’s happened in data going back to the start of the century. Even the Top 40 index of large caps on the JSE has solidly outperformed the S&P 500 by almost 4%.
Market underperformance
The reason for US stock market underperformance is simple; market concentration is a great thing when those stocks are flying, but it is a problem when they lose their lustre. And thus far this year, the Magnificent 7 of Tesla, Amazon, Microsoft, Alphabet, Nvidia, Meta and Apple have been struggling, down just over 1%. Deepseek’s R1, the Chinese AI model built on a fraction of what it cost to build Silicon Valley’s equivalents, has damaged the narrative that the future is being built by those American megacaps throwing tens of billions of dollars at AI.
Further, if one looks deeper and below the headline market and economic indicators, US so-called exceptionalism starts to look not all that exceptional at all. Take healthcare: despite the US spending more as a percentage of GDP on healthcare than any other Organisation for Economic Co-operation and Development country (close to a fifth of US GDP), the results are grim. Americans tend to live shorter lives, suffer from more chronic illnesses, and are more likely to die from a preventable disease or condition than citizens in other rich countries.
Ironically, this has been a major driver of the so-called “robust” US jobs market. More than 40% of new private sector jobs created since the start of 2023 have been in the healthcare industry. Put simply, a substantial share of the US’s “booming” economy is generated by the country poisoning itself.
Second, government spending has accounted for a large proportion of economic activity since Covid-19. Typically seen as a “small government” country compared with the high tax and big state European systems, the reality bears out completely differently. Since early 2023, the government has created more jobs than lauded sectors such as tech, finance, construction and manufacturing put together.
According to economist Tej Parikh, public transfers, or government handouts like social security, account for more than a quarter of residents’ income in more than 50% of US counties. This is far higher than in almost all European countries. US public sector spending as a percentage of GDP is approaching its post-World War peak — and it is most likely to rise as massive bond issuance pushes debt interest payments up.
Liberal spending on healthcare and benefits
But still the US refuses to tax as highly as it should for a country spending so liberally on healthcare and benefits, which has resulted in it running wartime-level budget deficits since the pandemic. The dollar’s reserve currency status has enabled the US to exceed its fiscal limits for an extended period. Whether that can continue is another question.
Finally, much of the “exceptional” US growth comes from the strength of the US consumer. But that too needs to be interrogated; the stereotype of the “resilient” US consumer who spends greedily on shopping and restaurants may not be accurate. For starters, much of services spending has been on necessities such as rent, utilities and health, which have seen the most inflation. While it is true that discretionary spending has risen, that is heavily skewed by the highest earners. Recent Fed research shows wealthier households have driven post-pandemic retail spending, while low income households are, in real terms, poorer than before.
Increasingly, credit is needed to cover the soaring cost of living (Americans save less than other rich nations, and average credit card debt is among the highest in the world.) Outstanding US consumer debt surged by the most on record in December, reflecting massive increases in credit-card balances and non-revolving credit. Credit card and auto loan delinquencies across the US are now at their highest since the financial crisis, and although mortgage distress is below historic averages, rents have soared. These are all indicators synonymous with the end of the business cycle.
Political decline
But underlying these economic signs of malaise, imbalance and deterioration is a more profoundly damaging political decline. As economist Daron Acemoglu has argued, the “crumbling of American institutions”, which has been happening since the financial crisis, could be what eventually humbles the great American empire.
“American economic success in the era after the second world war depended on innovation, which in turn relied on strong institutions that encouraged people to invest in new technologies, trusting that their inventiveness would be rewarded.
“Democracy’s bargain everywhere, and especially in the US, was to provide shared prosperity (economic growth out of which most people benefited), high-quality public services (such as roads, education, healthcare) and voice (so that people could feel they were participating in their own government). From about 1980 onwards, all three parts of this bargain started to fall away.” The financial crisis and Covid-19 pandemic accelerated these trends.
America’s eventual collapse could echo Hemingway’s famous line on bankruptcy. It will happen gradually, as shared wealth, high-quality public services and the functioning of democratic institutions weaken, and then suddenly, as Americans stop trusting and supporting those foundations of their democracy.
The Trumpian United States of America is not short of confidence, or perhaps hubris; and just as the Ancient Greeks understood, hubris is always followed by nemesis. DM
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