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US economy Recovery, What Recovery?
WE WERE told that the US economic recession was over. Now the apparent recovery is being described as sluggish, fragile, shallow, uncertain or maybe not a recovery at all.
On the surface the economic data points to a robust recovery in the US as its GDP grew at an annual rate of 5.8% between January and March this year.
However on closer inspection some of the elements that have contributed to a higher GDP are dubious.
For a start four-fifths of this increase was attributed to a sharp downturn in the speed at which firms cut down on their stocks of unsold goods.
Defence and other increases in government spending have also been included. Once these and other temporary factors are taken out then actual growth is estimated to be as low as 1.5%.
Recent economic data show a continuing fall in the value of the stock market, low investment, massive consumer and company debts as well as a falling dollar.
Following on from the collapse in the NASDAQ market (which deals in high technology shares), the Standard and Poor (S&P) 500 index (which charts the progress of a basket of stocks and shares) has lost 7% of its value this year and one quarter of its value since the end of March 2000.
These figures reflect uncertainty and continuing fundamental problems within the US economy.
One reason given for the sluggish stock market is the continuing uncertainty in the world since 11 September and Bush's "war against terrorism".
The prevailing mood of investors is not to tie up capital for a long and uncertain period but to look for quick returns Following the collapse of Enron, there is a tendency to distrust firms' accounting practices and consequently their reported profits.
Most significantly it reflects a fall in profits which have suffered a severe collapse. The drop in profits during last year's recession was one of the steepest of any recession.
Low profits of course discourage investment. Another reason for low investment is the large amount of spare capacity in many parts of the economy. When production picks up there is no need to expand or take on new workers and hence no new investment.
HOWEVER THE recent recession was one-sided, because while company profits and investment fell, consumer spending boomed. With low prices and cheap credit this area of the economy is still growing.
In fact consumer spending is estimated to be propping up two thirds of the US economy. Consumer debt in the US is now 45% higher than disposable income and is unsustainable.
As well as huge debts, US workers are also facing increased unemployment and earnings growth is the lowest for six years. Unemployment is at an eight-year high with 100,000 jobs gone so far this year.
Company debts are also enormous, with the result that some quite large companies can no longer pay them off.
There were more defaults worldwide than ever last year, with 216 companies defaulting on £116 billion of debt. In the US, corporate debt is rising faster than in the 1990/1991 recession and there are no signs of it slowing up.
The Financial Times recently remarked that "the recovery is coming without the recession having resolved all the ills of the economic boom of the late 1990s".
In other words the recession was not brutal enough in deflating the markets and forcing the dollar lower.
Already there are signs of overseas investors starting to sell US assets due to lower returns and the huge debts of US companies. Without this income the US will have difficulties financing its current account deficit.
This is presently $1.5 billion a day - meaning that the US buys $1.5 billion more goods and services from abroad than it sells to other countries.
The US economy accounts for about a third of world output and is therefore crucial to world economic growth.
However with profits and investment remaining weak there can be no sustainable growth and the continuing weakness of the US economy will affect economies throughout the world.
As usual the working class and poor will pay the price with unemployment and more cuts in services.
Consumer Bubble Will Burst
THE BRITISH economy has not been immune from economic developments in the US and worldwide. Exports are now at their lowest level for two years.
Manufacturing output fell 1.5% in the first quarter of this year. According to one economist, Britain was a "hair's breadth away from recession" (Financial Times 25/26 May).
Only consumer spending has kept the economy afloat. But for how long?
Spending has been boosted by low interest rates and the housing boom "wealth factor". House prices have shot up by 18.5% in the last year.
As the value of their house has gone up, people have felt richer and borrowed and spent more money.
House prices are now the equivalent of 5.5 times average earnings. This is similar to the levels during the 1980s housing boom which crashed when interest rates went up.
Even a small increase in interest rates could have a serious effect on spending, bursting the consumer bubble.
Even now economists are predicting growth of just 1.5% - 1.8% this year - much lower than the 2% - 2.5% Gordon Brown expects.
This could mean tax rises or public spending cuts or a combination of both.
Business profitability is at a two and half-year low. £20 billion was wiped off share prices last week, making a total loss of £280 billion since the end of 1999.
With overcapacity in the world economy and feeble growth in the US there is little to suggest that there will be any significant increase in profitability.
This will mean continued attacks on jobs, wages and working conditions.
In The Socialist 14 June 2002: