Financial journalists have long had a name for their ideal economy. Inspired by everyone’s favourite breakfast-stealing mischief-maker, a ‘Goldilocks’ economy: not too hot, not too cold, growing briskly enough to keep company profits rising, but gently enough that inflation and interest rates stay becalmed. In other words, the porridge is just right.
Last week though, the news flow showed America’s economy to be rather more blazing than nicely ambient.
New survey data showed US business activity expanding at its fastest pace in more than five years. In fact, if one excludes the ‘snapback’ recovery from COVID, the new surveys showed the strongest growth in business activity since early 2015.
What’s more, factory production grew more quickly than at any point since 2022, new orders rose at a rate not seen in four-and-a-half years, and fewer people than expected filed for unemployment benefit. On these figures, the American economy may have grown at an annual rate of around 4% over the summer – a long way from the slowdown widely feared after the Iran war got underway.
Great news: this is a strong foundation from which companies can continue to grow profits. However, the flipside is that an oven-hot economy also makes it likelier that the US central bank will raise interest rates again next month to bring inflation to heel. Indeed, several officials said as much during the week. Investors took the hint and now see a roughly 70% chance of a US rate rise in October. A month ago, they saw barely one chance in ten.
This change in expectations once again pushed the interest rates on government borrowing higher. The cost for the US government to borrow over 30 years reached 5.5%, its highest since 2004, with the UK equivalent also climbing.
Yet share markets took it all in their stride. America's key S&P 500 index rose 1.2% on the week, led once more by the technology giants. For all the challenges that interest rate rises can pose in the shorter term, profits are what drive share prices in the long term – and profits are being delivered.
Goldilocks might disagree, but for those with greater risk appetites, a little heat may well be no bad thing. Next time you’re at the breakfast table, maybe try a little paprika on your porridge.
