US growth rate climbs, but economic problems remain
31 October 2003
Nearly two years after the official end of the recession, the US economy has recorded its fastest growth rate in almost two decades. Figures released by the Commerce Department on Thursday showed that in the third quarter, gross domestic product (GDP) expanded at a seasonally adjusted annual rate of 7.2 percent; well above the 6 percent forecast by economists and more than double the rate of 3.3 percent in the second quarter.
While the GDP expansion was the most rapid since the third quarter of 1984, when the US economy grew at a rate of 9 percent, a number of aspects of the present recovery indicate that the operation of the business cycle is far from normal.
Consumer spending, financed by low interest rates and increasing debt, was a major component of the increased growth. Overall consumption spending, which accounts for two thirds of the GDP, was up by 6.6 percent compared to 3.8 percent in the second quarter. This was the fastest increase in consumption spending since the first quarter of 1988, much of it due to a surge in purchases of consumer durables, including cars, which rose by 26.9 percent following a 24.3 percent increase in the second quarter.
Business spending also lifted, up 11.1 percent, following an increase of 7.3 percent in the second quarter—the largest increase in this item since the first quarter of 2000.
On the surface these figures point to the start of a self-sustaining recovery, with both business and consumption spending on the rise. Closer examination of the state of the US economy, however, reveals that this is far from the case.
In the first place, the increase in consumption spending was not the result of a rise in aggregate income, flowing from increased employment, as would be the case in a “normal” recovery. According to the Economic Policy Institute, “the strength of consumer spending rested on tax cuts and mortgage refinancing” with a one time tax cut boosting disposable income by $100 billion. This meant that after-tax income grew by 7.2 percent. Before-tax income, however, rose by only 1 percent, while real wage and salary income, after taking inflation into account, actually fell by 0.1 percent in the quarter.
The income figures point to the main peculiarity of the present “recovery”—the continued decline in employment. In a comment published on October 24, Morgan Stanley chief economist Stephen Roach noted that “by our calculations, over the first 21 months of this recovery, real wage and salary disbursements—the dominant component of personal income—are running about $320 billion below the path that would have been generated in a normal recovery.”
According to his figures, some 22 months after the recession supposedly ended in November 2001, private sector hiring in the US economy was running 4.3 million workers below the norm of the past six recoveries.
Other figures highlight this process. In a recent comment, New York Times op-ed columnist, Bob Herbert, pointed out that in the past two years the number of Americans living in poverty has increased by three million, while the median household income has fallen for the past two years. According to research by EPI senior economist Jared Bernstein the decline in the number of hours worked by families, rather than by individuals, was “of a magnitude that’s historically been commensurate with double digit unemployment rates.” Not only are fewer family members working, the ones who are employed are working less hours.
Another peculiarity of the present recovery is the behaviour of the US Federal Reserve. On Tuesday, the Fed decided to keep its short-term interest rate at its 45-year low of 1 percent and indicated that its easy money policy would be maintained “for a considerable period.”
This seems to indicate that the Fed fears that if it starts to raise interest rates, even by a relatively small amount, debt-financed consumption spending, which has largely sustained the US economy over the past two years, could be adversely affected.
In its statement on interest rate policy, the Fed noted that “business pricing power and increases in core consumer prices remain muted” and that “the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future”.
The continued lack of business pricing power has major implications for employment. It points to the fact that increased profits will come, not from increased sales and additional hiring to meet demand, but from the introduction of new technologies which will cut labour costs and reduce employment.
Considering the US economy as a whole, the latest growth figures do nothing to lessen concerns among economists over the growing structural imbalances—in particular, the widening balance of payments deficit and the growing budget deficit, which both stand at more than half a trillion dollars.
In an interview published earlier this week, former BusinessWeek chief economist William Wolman referred to the mounting debt problems.
“If you add up America’s trade deficit and its federal budget deficit, and state and local deficits, you reach a ratio of debt to income which puts us in a category where the World Bank and the IMF would rate us as dangerous, if we weren’t the strongest country in the world but just an average country,” he said. “Dangers spring from these twin deficits that will end up putting upward pressure on interest rates.”
These dangers are not going to be overcome through increased US growth and may well be worsened. If the US economy keeps expanding at a faster rate than the world average, then the current account deficit will continue to widen, making the American financial system even more dependent on an inflow of funds, especially from Japan and the rest of East Asia.
However, if growth rates increase in the rest of the world, funds will be attracted elsewhere and it will be increasingly difficult to finance the US deficits. Accordingly, in order to attract funds, yields on Treasury bonds will have to rise, bringing an increase in interest rates throughout the economy, leading to slower US growth or possibly a recession if debt-financed consumption spending falls rapidly.
This growing tendency of economic growth to resemble a “zero-sum game”, or a “see-saw” as the noted British economic analyst Brian Reading put it, points to the fact that the world economy as a whole is afflicted with deep-seated structural problems, manifested in overcapacity and over-production.