By James Pethokoukis

Some pessimists write off the rising American stock market — the S&P 500 is up 20 percent so far this year — as reflecting little more than easy money. Don’t fight the Fed! Now, I’m not going to give a definitive answer as to why the stock market does this or that. But what if Wall Street’s strong performance is suggesting the US economy has some deep strengths that too many overlook? If nothing else, this bull run gives us reason to examine some of those economic positives.

If you were going to fashion a critique of the US economy, the boilerplate bullet points would highlight supposed flaws such as too little dynamism, too much parochialism, and a continuing trend toward monopoly. A sharp analysis in The Economist offers a counterpoint to this thesis that “everybody” knows is true. But it might not be.

First, the economy seems to be getting more dynamic. More businesses are being started, more people are willing to quit their jobs, and more and more “unicorns” (startups with a valuation of $1 billion or more) are popping into existence.

(As an aside, here’s what University of Maryland economist John Haltiwanger, who’s quoted in The Economist piece, told me in July during a podcast chat: “So the question is whether the businesses that started last summer were the ‘necessity’/‘transitory’ kind that took advantage of the fact that there were lots of pandemic-related needs in the economy, and whether the businesses this spring are a little bit more forward-looking and will maybe even persist a little longer. We don’t have any evidence to determine the answer at this point.”)

Second, despite the protectionist swerve in American trade policy, lots in the business world has stayed steady. The piece notes that the ratio of total manufactured goods imported from key trading partners versus US manufacturing output hasn’t budged over the past three years. And while some US companies are serious about shifting operations from China, their next-choice destinations are countries near China, not America. What’s more, foreign consumers are still pretty important to Corporate America: “Overall, the median firm’s [non-financial firms in the Russell 3000] foreign sales as a share of its total sales has stayed roughly flat at 15 percent. So has the revenue-weighted average, which has oscillated around 35 percent. Two in five firms make more than half of their sales overseas, a proportion that has also remained more or less constant in the past four years.”

The Economist also offers a corrective to concerns about market concentration. Fun fact: “Although concentration edged up in around half of industries between 2012 and 2017, the weighted-average market share across all industries remained at 32 percent.” But let’s focus on Big Tech, since so much of Washington and the media do:

Big tech in particular has benefited from the pandemic shift to all things digital. America’s five technology titans — Apple, Microsoft, Alphabet, Amazon and Facebook — notched up combined revenues of $1.3trn in the past 12 months, 43 percent higher than in 2019. They are America’s five most valuable firms, accounting for 16 percent of the country’s entire stockmarket value — considerably higher than the 10 percent attributable to the five biggest American firms in the past 50 years, according to calculations by Thomas Philippon of New York University’s Stern School of business.

 . . . [But] the tech giants, for example, are increasingly stomping on each others’ turf. Nearly two-fifths of the revenues of the big five now come from areas where their businesses overlap, up from a fifth in 2015. Facebook wants to become an e-merchant, Amazon is getting into online advertising, Google and Microsoft are challenging Amazon in the computing cloud, and Apple is reportedly building a search engine.

And if even Big Tech companies stay dominant in their core businesses, competition researcher Nicolas Petit argues that they are in “holistic competition” with each other across a variety of industries such as cloud computing, autonomous driving, and virtual reality devices. They also compete aggressively for talent. Then there’s all that R&D spending they do — spending driven not just to raise future profits but to avoid being disrupted or displaced by new technologies. They’re all looking for the next big market or transformational technology. Not the kind of behavior one would expect to see from sedate monopolists.

None of this means there isn’t plenty of public policy work to do to create a more productive economy that works for Americans. But maybe a bit less work than many might think.

The post Are the deep fundamentals of the US economy actually pretty strong? appeared first on American Enterprise Institute – AEI.