|SocialismToday Socialist Party magazine|
US economy: heading for recession?
THE US economy slowed down sharply before the mid-term elections. Data for the third quarter of 2006 showed that gross domestic product (GDP) grew only 1.6% (at an annualised rate) compared with 2.6% in the previous quarter. Recently, it is true, the growth-rate has fluctuated quite a lot. But the latest figures suggest the possibility of a recession.
The deepening recession in the housing market, with a 17% fall in residential property investment, cancelled out any positive effects from the fall in energy prices. Consumer spending (especially among more affluent consumers), is still the mainspring of US growth and remained quite strong (3.1% annualised rate). But working families are more dependent than ever on debt. Since 2001, consumer spending has exceeded growth of incomes from wages and salaries by $270 billion a year.
In contrast, Bush propagandists were boasting about record stock market highs in October – the result, they claimed, of their policy of tax cuts for the super-rich. True, the Dow Jones surpassed its January 2000 bubble peak. But adjusted for inflation, the only serious basis for comparison, it is still more than 15% down. It would have to rise over 2,300 points to set a new inflation-adjusted record. The S&P 500, based on a much broader range of company shares, is about 10% down on its 2000 peak in nominal terms and more than 25% down after adjusting for inflation.
In any case, new stock-exchange peaks will bring little or no comfort to the majority of working families. Only a third of US households have stock holdings worth more than $5,000 (2004 data). The wealthiest 10% of households own 80% of all stocks, while the bottom 90% own just 20% (mostly through retirement savings plans).
Bush officials also highlighted the recent fall in unemployment, down to a five-year low of 4.4% (6.7 million people) in October. Nevertheless, the creation of new jobs remains weak by comparison with previous business cycles. The percentage of the working-age population that is employed has continued to fall (now 63.3% compared with the peak of 64.7% in April 2000).
Employment growth continues to be strongest in the service sector, especially health and education. Job growth has been strongest among older workers and part-timers (many of whom really need full-time jobs). Construction and related sectors have been shedding jobs, while manufacturing employment is still falling (factory employment has fallen by 187,000 jobs since September 2003), reflecting continuing de-industrialisation.
The main cause of the recent slowdown is the gathering collapse of the housing market. From the mid-1990s, the US developed an enormous housing bubble, fuelled by an abundance of cheap credit. Nationally, house prices rose 70% more than prices in general (historically, they tended to rise at the same rate), and even more in ‘hot spots’ like Boston and San Francisco.
As a result of the bubble, housing pumped an additional $5 trillion of extra paper wealth into the economy. Like the stock-exchange bubble of the late 1990s, the housing bubble raised the level of consumer spending. In fact, it had an even greater impact because the ‘wealth effect’ from housing has involved much broader layers of the population.
Many families have used their homes like ATM machines, borrowing against rising values. In recent years, they have been ‘cashing out’ about $700 billion annually. This process is now coming to an end. Interest rate rises by the Federal Reserve (benchmark rate up from 1% in 2003 to 5.25% this year) are making home loans more expensive and pushing house prices down. Borrowers are beginning to run out of both housing equity and income. More and more families will find themselves in difficulties. Already, there has been a sharp rise in delinquencies (arrears over 60 days) and foreclosures.
Sales of new houses have slowed right down, sustained only by big discounts and other incentives to buyers. Sales of existing houses have fallen quite sharply. This will impact on investment and employment, with further knock-on effects. Between 2001 and 2006, construction and related sectors (building materials, furniture, real estate finance, etc) accounted for 69% of private-sector job creation.
In the news media there is plenty of reassuring talk about the housing market ‘bottoming out’. But this is contradicted by actual trends. A University of Maryland economist, Peter Morici, comments: "The speculative frenzy of recent years is causing a major adjustment, and the happy talk of realtors is prolonging the process. The absence of realistic analysis about the extent of overvaluation is characteristic in an industry that sees nothing but an upward progression for values, but houses like any other asset can be overpriced… things are likely to get worse before they get better". (Record Drop in Home Prices, Washington Post, 26 October)
The housing market is different from the stock market. While shares are liable to crash suddenly, housing tends to decline more slowly. Existing homeowners sit tight, hoping that prices will recover. Nevertheless, all the signs are that housing has entered a serious recession, and is far from having reached the bottom. Even a ‘soft landing’ for housing will depress consumer spending and might well push the whole US economy into recession. But a ‘hard landing’ could cause a lot of collateral damage, with construction-sector bankruptcies and turmoil among over-extended mortgage lenders.
Corporations have been announcing record profits. This reflects the intense cost-cutting imposed by bosses since the 2001 recession. Jobs have been shed, wages squeezed and benefits cut back, while output of goods and services has significantly increased.
At the end of 2005, corporate profits as a share of GDP matched the previous peak level of 1968, at the height of the post-war economic upswing. Since the peak of the last business cycle (first quarter 2001), the share of national wealth going to corporate profits has risen by 3.9%, while the share going to labour compensation (wages and benefits) has fallen by 1.4 percentage points.
No wonder working families are increasingly relying on debt to compensate for falling income from wages and salaries. The average household debt is now 129% of disposable (after-tax) income. As interest rates rise, the growing burden of debt is inevitably beginning to effect consumer spending.
Virtually none of the productivity gains (increased output per worker/hour) of the last five years have been passed on to workers. Average real (inflation-adjusted) weekly earnings this summer were almost identical to those in March 2001.
Imports into the US continued to grow faster (7.8%) than exports (6.5%) in the third quarter, raising the trade deficit to yet another record high of $810 billion (6.1% of GDP). There was a slight fall in the September trade deficit (mainly reflecting the reduced value of oil imports). But even if this improvement were to be sustained, the annual deficit would still be $790 billion compared with $717 billion last year. Recurring deficits, year after year, have to be financed by a massive inflow of money into the country. This takes the form of overseas investors buying property, companies or financial assets in the US.
Increasingly, it has been foreign governments buying US government bonds. In particular, China, Japan, South Korea and other East Asian exporters who have trade surpluses with the US have felt compelled to sustain the US economy as a crucial market for their exports.
As a result of this process, US capitalism has an accumulated debt of $2.69 trillion to the rest of the world. In the second quarter of 2006 the US paid $36 billion interest to overseas holders of US government securities (1.1% of GDP on an annualised basis).
This unprecedented relationship between US capitalism and a powerful clutch of Asian exporters has lasted for an extraordinarily long time. But it cannot go on for ever. At some point, a downturn in the US economy – or a financial crisis – will trigger a sharp fall in the value of the dollar against major currencies. China, Japan, etc, have a vested interest in sustaining US economic growth. But at a certain point, they will no longer be able to prevent a breakneck slide of the dollar, despite their massive reserves. They will accept some losses to sustain their US markets, but are unlikely to allow the value of their US assets to be wiped out by a massive devaluation of the dollar. Sooner or later, like private speculators, they will sell their dollar assets, thus accelerating the fall of the greenback
For over 25 years, the US capitalist class has been steadily intensifying the exploitation of US workers (as well as workers internationally). Under Clinton and especially Bush, big business has enjoyed unrestrained free-market policies, which have resulted in a shameless profits bonanza. Yet economically US capitalism is not in a strong position. Its short-sighted profits orgy has undermined its own foundations, and the system faces a future of economic crisis and political upheaval.