The American Revival Is Underway

The U.S. economy is emerging from its funk to be a world leader once again.

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You're familiar with the story of America's decline. It may now be time to start talking about a new story: America's revival.

The litany of problems with the U.S. economy is familiar—chronic high unemployment, an overindebted federal government, a ruinously expensive healthcare system—and those won't get solved any time soon. But the U.S. economy is emerging from the gloom of a long-lived downturn faster than many other nations, and it looks especially impressive when compared with the never-ending mess in Europe.

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"During much of the last decade, the U.S. economy did not look good compared to a lot of other countries," Gary Thayer, chief macro strategist at Wells Fargo Advisors wrote in a recent report. "The situation has changed. The United States seems to be doing better than many other countries and could lead the rest of the world out of its current slump."

The recent financial crisis in Cyprus, which still hasn't fully run its course, shows how fragile the 17-nation Eurozone—a bigger economic bloc than the United States—continues to be. The tiny island nation triggered worldwide worry because of fears that bank runs there could spread to larger European nations. That would be like two insolvent banks in Rhode Island threatening to bring down all of Wall Street.

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The Cyprus crisis will probably stay contained there, yet the banking system in parts of Europe remains notoriously shaky. It doesn't help that the Eurozone is mired in a double-dip recession that seems to be getting worse, not better.

In the United States by contrast, regulators have been more aggressive about unearthing problems at banks, which is why the U.S. financial system is generally stable less than five years after it nearly collapsed. And the U.S. economy is growing faster than expected. Forecasting firm Macroeconomic Advisers, for instance, recently raised its estimate of first-quarter GDP growth from 2.3 percent to a healthy 3.2 percent.

The U.S. economy has outperformed Japan's for a long time, and that will probably continue to be the case. Japan's central bank seems to be undertaking new efforts to defibrillate the stagnant Japanese economy, which may help. But it's five years behind the U.S. Federal Reserve, whose aggressive easy-money policies are now helping boost home and car sales, while also pushing stock prices higher.

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Many Americans believe China's economy is the world's most powerful, even though China's GDP per capita is still less than one-fifth that of the United States. China is growing rapidly, of course, yet it remains a corrupt nation with choking pollution, inefficient state-run conglomerates and a legal system so fishy that thousands of dead pigs can show up in a major river outside of Shanghai and nobody can figure out why. Despite its industrial prowess, China is still a long way from being a modern, first-rate information economy.

America's standing has dropped noticeably in rankings such as the World Economic Forum's global competitiveness index, in which the United States has fallen from first to seventh since 2008. But the reasons for that decline may be reversing themselves. The biggest U.S. weakness in the latest WEF survey was its macroeconomic environment. That is clearly improving, with the financial meltdown of 2008 and subsequent recession finally generating reforms such as tougher banking regulations and a sharp reduction in private-sector debt that will make the U.S. economy stronger in the long run.

Another big U.S. liability has been the dysfunctional political system in Washington, which needs no explanation. Yet despite all the tiresome political warfare, there have been tax hikes and spending cuts so far in 2013 that ought to trim the mushrooming national debt by $2 trillion or so over 10 years, which is roughly halfway toward the $4 trillion target most budget hawks are aiming for.

Beyond that, there will be no U.S. government shutdown this year, since Congress recently passed government funding bills with virtually none of the controversy expected just a few weeks ago. Talk of further downgrades on the U.S. credit rating has quieted. If politicians manage a smooth extension of the federal borrowing limit this summer, the last of the worrisome fiscal showdowns will be in the rearview mirror. You heard it here first: The United States will soon begin to crawl back upward in the WEF rankings and other measures of global competitiveness.

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Such promising developments are beginning to show up in the real economy. Foreign capital continues to flow into the United States, a sign that investors who can choose to deploy their cash virtually anywhere feel the U.S. economy remains a strong bet. Some analysts predict a strong manufacturing revival, as U.S. costs become more competitive and other factors make the United States an attractive place to build stuff once again. And the U.S. energy boom could be truly transformative, bringing cheaper fuel and many collateral benefits to consumers, manufacturers and other types of business.

There will still be some backsliding in the U.S. economy as under-skilled workers struggle to find jobs, government austerity measures take a bite out of growth and some Americans grapple with falling living standards. But favorable trends ought to keep the dollar strong and inflation low, says Thayer, while providing a natural lift to U.S. stocks and eventually helping create more jobs. It's far too early to declare "Mission Accomplished," but America is on its way back.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.