Everything
seems to be on the up and up so far as the recovery
in the US economy is concerned. Last week the Commerce
Department made a second revision of its estimate of
the annual growth rate in the fourth quarter of last
year, lifting it to 1.7 percent, compared with its initial
estimate of only 0.2 percent.
This was followed by the news this week that manufacturing
activity in March rose to its highest level since February
2000 as factories boosted production to meet the biggest
increase in demand for eight years. One of the key indicators
of future activity, the Institute for Supply Management's
monthly Purchasing Managers' Index, rose in March to
55.6 from 54.7 in February. (Any figure above 50 indicates
growth, below 50 contraction.)
Now Wall Street investment bank Merrill Lynch is predicting
a major increase in the rate of the growth of the gross
domestic product. According to the firm's latest forecast,
GDP growth will rise to 4.8 percent by the fourth quarter
of this year, while the economy will grow by 3.2 percent
overall in 2002—about half a percentage point
above its previous forecast.
But even as the economic revival numbers continue to
flow in, there are fears in some quarters that all is
not as it seems and that the upturn may be simply the
outcome of another financial bubble. These concerns
centre on the fact that the recession of 2001 is unlike
any other in the post-war period. Generally in a recession,
there is a fall in debt, a decline in the balance of
payments deficit and a fall in consumption spending.
None of these things has happened this time around.
One of the main reasons for this peculiar outcome has
been the maintenance of high levels of consumption spending,
fuelled by increases in house prices. At least that
is the view of the Economist magazine. In an article
entitled "The houses that saved the world",
published on March 28, it noted that increased house
prices may have helped "shelter the world economy
from deep recession."
The downturn in the US economy in 2001 was the outcome
of a rapid decline in corporate profits—estimated
to be the steepest since the 1930s depression—the
collapse of the share market bubble and a sharp drop
in business investment.
While the interest rate cuts ordered by the Federal
Reserve Board made little impact on investment decisions,
or even the share market, they have had a significant
effect on housing. With official interest rates at a
40-year low, and mortgages consequently cheaper, house
prices have risen sharply. According to the Economist,
the average rise in US house prices of nine percent
in real terms over the past year is the biggest increase
ever. With two-thirds of Americans owning their own
homes, the rising value of this asset has tended to
encourage increased spending.
The boom has not been confined to the US. In countries
such as Britain, Spain, Australia and France, the article
notes, "house prices have been rising at their
fastest pace in real terms since the late 1980s boom."
"The boom in house prices stands in sharp contrast
to previous economic downturns, when house prices typically
stagnated or fell. Unlike in previous post-war cycles,
this downturn was not caused by a spurt in inflation
which forced central banks to raise interest rates sharply,
thereby killing off a housing boom."
Instead the US entered recession with low and even falling
inflation rates, enabling the Fed to cut interest rates
in order to provide a cushion for consumption spending
to counter the rapid decline in business investment.
While these measures may have prevented a deep recession
they have not resolved the underlying economic problems
and could well be deepening them.
As the Economist put it: "Massive monetary easing
by central banks has succeeded in propping up consumer
spending around the world, partly by boosting housing
prices. To put it crudely: as one bubble burst another
started to inflate."
The peculiar dynamics of the US and world economy are
also being discussed in some US financial circles. Morgan
Stanley chief economist Stephen Roach points out that
in the five years ending mid-2000 the US accounting
for 40 percent of the increase in global GDP, roughly
double its 20 percent share in the world economy. But
the US will not be able to deliver a similar boost to
the world economy in the coming period.
This is because of the widening US current account deficit.
In the past, recessions have led to a reduction in the
payments deficit to near balance. This is not the case
on this occasion. The balance of payments deficit is
currently running at 4.1 percent of GDP and could widen
to as much as 6 percent in 2003. At this level America
would have to suck in capital from the rest of the world
at the rate of $2 billion a day to finance its external
imbalance.
Another to voice concerns over peculiar features of
the current recovery is Rob Parenteau, global strategist
for the firm Dresdner RCM. In an article published on
March 8 entitled "The unanticipated consequences
of an incomplete recession", he claims that "because
the recession was odd, any recovery will be even odder
still."
"In many ways, the recession process is incomplete.
For example, consumer cyclical spending growth never
fell negative, housing prices never corrected, equity
market multiples never fell below long term averages,
the trade deficit never returned to balance, and perhaps
most important of all, private sector balance sheets
never got cleaned up. All these departures from normal
business cycle recessions are in fact intimately related—they
are expressions of continued financial imbalances in
the US economy ..."
The fundamental "imbalance" is the gap between
private income and expenditure which has seen a rapid
increase in debt. The problem, according to Parenteau,
is that in the absence of a fiscal stimulus and improving
trade deficit, "the only way the economy can grow
is if the private sector returns to and deepens its
deficit spending ways again."
According to conventional analysis, economic recovery
means higher income flows to the corporate and household
sectors, leading in turn to debt reduction.
Not so this time around, he insists, because "given
the current policy configuration, any improvement in
private incomes can only come from an acceleration in
private deficit spending and hence private debt loads.
... There is a bubble left to pop, and that is the bubble
of credit left on private balance sheets. We have seen
the equity bubble pop, and we have seen the tech capital
spending bubble pop. The corporate and household debt
bubble will also pop, but curiously and paradoxically,
it may be most likely to pop during the upcoming recovery..."
In other words,
while statistics on production, investment and consumption
may point to an upturn in the economy, these figures
could themselves be the result of processes that are
weakening its foundations.
April 5, 2002.
[Source: www.wsws.org] |