Actually, the economy is in great shape

Contrary to the media headlines, the fundamentals of the United States economy, and consequently U.S. stocks, are outstanding. The global oil price and elevated yields on longer-dated U.S. Treasuries are distractions.The latest information on the state of the economy is extremely positive. The Federal Reserve Bank of Atlanta projects GDP growth for the current quarter at 4.8%. Moreover, the Institute for Supply Management’s August survey of the U.S. manufacturing sector produced a strong reading of 54.6, the second highest since 2022. With that report, the manufacturing sector has now expanded for eight consecutive months. The labor market also remains healthy and resilient. Unemployment claims are running at historically low levels. The ADP survey of private-sector employment, released on Sept. 2, showed that American businesses continue to add jobs.Households continue to enjoy solid real income gains, even with elevated prices for gasoline and other fuels. Household balance sheets are strong, consumers have been reducing their debt obligations, and, very importantly, household wealth is at record levels. Even on the inflation front, the recent news is positive. Inflation is drifting lower. The Federal Reserve Bank of Cleveland’s inflation forecasting model sees core inflation declining to an annual rate of 2.3% following the September and October Consumer Price Index reports. That rate would remain above the Federal Reserve’s 2% inflation target, but the trend would clearly be positive. A majority of market participants believe that the Federal Reserve will raise rates at its mid-September meeting. But with inflation expected to move lower in the coming months, an extended period of interest rate increases appears highly unlikely.The economy is also enjoying the tailwinds from the massive buildout of infrastructure necessary for the Artificial Intelligence Revolution, which could prove as economically important as the Industrial Revolution of the 1800s. Indeed, some economic experts go so far as to suggest that the AI Revolution could ultimately be as consequential for the global economy as the Enlightenment period of the 17th and 18th centuries.Demand for the data center computing power that forms the foundation of the AI Revolution continues to rise at an extraordinary rate. Against that backdrop, combined with the strength of the U.S. consumer sector, the economy should continue to grow at a solid pace for the foreseeable future. As for the U.S. stock market, earnings growth remains fabulous. In the just-ended second quarter, earnings for the S&P 500, the benchmark index for U.S. equities, expanded by more than 50%. Analysts expect strong earnings growth to continue over the next several quarters.HOCHUL DEMANDS TRUMP RESTORE $87 MILLION IN NEW YORK COUNTERTERRORISM FUNDINGThe U.S. corporate sector is also enjoying record-high profit margins. This extraordinary profitability is partly a function of the remarkable productivity of the U.S. technology sector. Nvidia, for example, which has become an engine of the artificial intelligence revolution, enjoys gross margins above 70% and generates more than $5 million in revenue per employee. Nvidia’s extraordinary profitability has allowed it to invest almost $30 billion in research and development during its current fiscal year, which ends Jan. 31, 2027.Strong economic growth, extraordinary corporate profitability, moderating inflation, and a relatively stable interest rate outlook are a powerful recipe for rising stock prices and a higher standard of living for Americans.The writer owns shares in Nvidia.James Rogan is a former U.S. diplomat who later worked in law and finance for over 30 years. He writes a subscription-based daily note on markets, economics, politics, and social issues. His email is [email protected].