Hamish McRae: America's confidence is good for us

One of the astounding things of the past week has been how the worlds of economics and finance have diverged from the world of global politics, at least when viewed from the US.

The catastrophe in the skies above Ukraine barely registered in the American financial markets. Shares went down a bit from yet another all-time high but by the close of play on Friday they had recovered much of their poise, and the futures markets point to further gains.

Of course there is a sniff of fear, as you might expect whenever markets have had a long rally, but it is fear about something going wrong at home, not abroad. What seems to matter from the perspective of American finance is what Federal Reserve chairman Janet Yellen thinks about the valuation of technology stocks or whether the company reporting season, which is just starting, will show that US Inc is still thumping out the profits.

If the Russian economy tanks in the months ahead, well, that is the effect that the sanctions approved by the US and Europe last week are supposed to have. It says something about the self-confidence of the US now — a self-confidence based partly on a sense that the economy has indeed reached escape velocity but also on the boom in oil and gas production.

Thanks to fracking, the US has this year passed Russia to become the world’s largest producer of oil and gas combined. This gives it a very different perspective from Europe: Europe needs Russian gas, America doesn’t.

It also doesn’t need Russia as a market. Russia takes a bit more than 2% of Germany’s exports, small but helpful, but it buys hardly anything from the US. For all its swagger as a member of the Bric club, which has just approved the founding of a rival to the World Bank, to be headquartered in Shanghai, the longer-term prospects for the Russian economy are pretty poor. It is the only large country in the world where life expectancy is falling, and its workforce is already in decline.

So what does preoccupy the US right now? The starting point is that, given what is happening elsewhere, it is a pretty good place to be. So what matters more than anything else is the health of corporate America. Good revenue figures from Google last week were more important than events in Ukraine or the Middle East. A lot of cheer was taken in the evidence that US companies were investing again — there were some good figures on that too.

The point is that so far the missing link in the recovery has been the relatively low levels of investment, a rather similar state of affairs to the UK although we differ in one crucial regard, in that the US has seen rapid productivity gains but poor job growth whereas we have experienced the reverse. Low investment would suggest that companies don’t quite trust the recovery to continue, while their own behaviour would tend to undermine it.

Historically, companies invest when they are profitable and they start running out of capacity. Both seem to be happening. A survey by Bloomberg suggests that so far in this reporting season, earnings have exceeded analysts’ forecasts in more than three-quarters of all cases. Sales are also running ahead of expectations in most cases too. Meanwhile, spare capacity is shrinking, and capacity use in manufacturing is at last up to its average level of recent years. The building blocks for an investment-led continued recovery are there.

If this is right, it is good news. It is always hard, when looking at the great swathes of data that the US economy churns out, to pick out the signals from the noise. But when data support what you instinctively feel when you visit a place, you should take it seriously. Having made several visits to the US this year, I do feel that confidence is noticeably stronger than it was a few months ago.