The End of American Exceptionalism?

The rest of the world is due some cyclical catch-up with the U.S., but talk of a structural change in the global economic ecosystem is premature.

During the initial 100 days of Donald Trump's presidency, I have traveled a fair amount to meet with clients, including visits to Canada. A frequently asked question has been whether we are witnessing the decline of American exceptionalism.

An important question, and to answer it, you must answer another: How do you define American exceptionalism?

Growth Gap

One could define American exceptionalism as a relatively recent phenomenon: the strong performance of the U.S. economy and equity market since the pandemic, particularly relative to Europe and China.

In that case, I think the answer is “yes,” we think that “exceptionalism” is indeed coming to a cyclical end, driven by projected slower growth and higher inflation.

Some of the positive growth gap that opened up since the pandemic was built on ultimately unsustainable government spending, which has sent the U.S. budget deficit to more than 6%. Last week, we found out that the U.S. economy shrank by about 0.3%, annualized, during the first quarter of 2025. A key component of the GDP calculation is the addition of “net exports,” which ended up being a significant negative for quarterly GDP as companies rushed to buy imported goods before higher tariffs were imposed. But positive consumption and inventory-building balanced that out, leaving a 0.25% drop in government spending as the residual negative contributor.

Lots of pluses and minuses but, net-net, a negative print, which, if followed by another in the second quarter, would meet the definition of a recession. Higher consumption today could mean lower consumption tomorrow. At the moment, however, the hard data suggests that the drag on U.S. growth reflects a smaller role for government in the economy, which is a stated aim of the current U.S. administration and part of a set of pro-private sector, pro-growth policies that include tax-cut extensions and looser regulation.

This cyclical transition and the secular shift from the public sector to the private sector is set to be bumpy—and the unpredictable approach to trade policy is making it bumpier than it needs to be—but we believe the ultimate destination will be long-term positive, more sustainable U.S. growth.

The Foremost Global Economic Power

Another way to define American exceptionalism is deeper and more historical. It refers to the emergence of the U.S. as the foremost global economic power.

This is partly about the decision, at Bretton Woods, to put the dollar at the heart of the world’s financial and trading ecosystem. But more important are the strengths and advantages that the U.S. economy enjoys: deep, liquid capital markets, a well-educated, flexible labor market and an exceptional entrepreneurial and risk-taking culture.

In U.S. venture capital, for example, eight or nine failures are baked into investment expectations in order to find one or two future “unicorns.” And those failures need not end careers in America: Some of the most successful founders have previously failed, often multiple times.

By comparison, Europe offers a comparably sized consumer market, but a smaller and much more fragmented capital market and a less flexible labor market. China’s economy is still dependent on government-led investment over consumption and its capital markets are tightly controlled.

Altogether, this has enabled American workers, business owners and investors to take the risks necessary to adapt to fast-changing economic trends, such as the industrial assembly line in the early 20^th century and the development of the internet a generation ago.

Today, we think phenomena like the rise of artificial intelligence—and even the growing disruption to politics, geopolitics and global supply chains—make this exceptional American flexibility a bigger competitive advantage than ever before.

Cyclical Catch-Up

Has capital been flowing from the U.S. to other regions recently? It looks that way—but, we see that as cyclical rather than structural, and we expect U.S. dollar primacy to continue for the foreseeable future.

The U.S. (and the U.S. Federal Reserve) is at a challenging point in this cycle, where inflationary pressures combine with the drag on growth from tariffs and reduced government spending. By contrast, Europe has a more benign inflation outlook and is just embarking on a new program of fiscal stimulus. This is why our Asset Allocation Committee just upgraded its view on European equities and fixed income.

Therefore, if clients are asking whether the rest of the world is due some cyclical catch-up against the U.S., my answer is yes. But if they ask me whether U.S. leadership of the world economy, over a long-term horizon, is in retreat, my answer is no.

“The chief business of the American people is business,” as President Calvin Coolidge famously put it almost exactly a century ago. In our view, that observation is still more true of the U.S. than any other country in the world.