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.
Lynn Walsh
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