Friday, 2 August 2013

US Economy Growing Strongly

Today's US non-farm payroll report showed an increase of 162,000. Market expectations were for a rise of 180,000. However, the unemployment rate fell to 7.4% bringing it closer to the point where the Federal Reserve says it will stop QE.  The data comes on the back of a series of other survey data over the last week or so showing that the US economy is growing strongly. The US ADP for July showed the US having added 200,000 jobs in July. The ISM manufacturing report of purchasing managers also showed signs of the economy growing strongly in July. Its manufacturing index came in at 55.4 compared with 50.9 in June. Any reading over 50 indicates the economy growing.

The latest GDP Report supported this view of a return to strong growth. US GDP for Q2 came in at 1.7%. Estimates has forecast a rise of only 1%, with some being as low as 0.6%. The rise came on the back of a downward revision of Q1 growth to 1%. However, what is significant here are two things. Firstly, the direction of travel. A rise from 1% to 1.7% growth represents a significant acceleration. Secondly, the conditions. As I reported last year, the proposed sequester would reduce US GDP by around 4% over a full year, because of the sudden reduction in government spending. Well the sequester went ahead, and government spending was slashed.

A 1.7% increase in GDP, therefore, means that removing the effects of the sequester, there has been an underlying increase in growth of between 3.5 and 4%. That figure is also consistent with the kind of growth figure for the US seen as possible by former Fed Governor, Robert Heller , if the Government stopped damaging growth with repeated political crises, based on electioneering by Republicans and Democrats.

In fact, its likely that the effects of the sequester have been front loaded. Consequently, in the second half of the year, its depressing effect should reduce, and US growth should rise more strongly. Stronger US growth is one reason that global bond yields are rising, as the demand for capital rises, for additional investment. Some of that investment will be for things like fracking, but a lot will be simply for additional circulating rather than fixed capital, i.e. to purchase additional materials, set on more workers and so on.

The stronger US growth is being assisted by stronger growth elsewhere. The latest data from the UK also shows some stronger growth, and increased employment, and the EU as a whole, seems to be clawing its way out of recession, though peripheral economies in Spain, Portugal, and Greece, remained deeply mired in a Depression that has been self-inflicted as a consequence of political decisions to impose austerity. The return to growth in the UK itself is rather anaemic, at 0.6% and still leaves the UK 3.3% smaller than it was in 2008. That is in stark contrast to the growth in the US, and reflects the difference in economic policies.

The US in 2008/9 as with the UK and other economies introduced not just monetary easing to prove the necessary liquidity to the system to end the credit crunch, but also Keynesian fiscal stimulus. Everywhere that resulted in a typical “V” shaped recovery. In the US, there was debate over the size of the stimulus of $.75 Trillion, with some Democrats and economists like Paul Krugman arguing it needed to be double that size. In fact, one reason some Democrats are opposing the nomination of Larry Summers as the next Chairman of the Federal Reserve is because he refused to support a larger fiscal stimulus at the time.

Even so, the US economy as a result of the fiscal stimulus has continued to grow, despite political crises over the sequester, and before that over the Debt Ceiling, and despite attempts by Republicans at state and local level to impose austerity measures. The fact, that the US economy has now been able to withstand the sequester and still grow at a reasonable pace, is an indication of how well the fiscal stimulus worked to put it in a place to be able to withstand it.

By contrast, in the UK, the Liberal-Tories inherited an economy growing at around 2.5% p.a., and by continually talking the economy down before and after the election with ridiculous scare stories about Britain being in the same dire straits as Greece, they managed to send it into a nose dive. Long before they had even begun to tank the economy further with their economically illiterate policy of austerity, they had undermined confidence and reduced economic activity. The austerity measures have only made things worse, which is why the UK economy still has not recovered even to the level of 2008.

The UK economy is growing again, despite not because of Government policies. To be fair, the UK economy would have slowed down anyway from the end of 2011, as part of the global 3 year cycle that has reduced growth in Europe, the US and even China until the beginning of this year. But, UK government policies cratered economic growth a year before that in 2010, and thereby put Britain in a worse position to deal with that slow down when it came. The same is true but on a larger scale for those Eurozone economies that have suffered from the imposition of austerity.

The problem for the UK, and particularly for the Government is that having tanked the economy, and left it in a position where the recovery is now weak, it will at best have a year of growth at around 1- 1.5%, before the next 3 year cycle sets in at the end of 2014. With growth only at those kinds of level, and much of it based on an attempt by the Government to once again goose the property market with various kinds of taxpayer funded bribes to the banks, builders, and debtors another slow down will send the UK economy back into recession ahead of the next election. Another comparison between the UK and US in indeed the kind of growth that is being seen.

In the UK, the economy continues to have huge numbers, around 150,000, of zombie companies, employing around 2 million people. Those companies can barely repay the interest on their loans, let alone repay the capital they have borrowed. With global interest rates rising, many of these companies will go bust, even as the economy grows. It also has around the same number of people occupying zombie jobs. That is jobs that are not real; jobs on zero hours contracts; temporary and casual jobs providing low hours on a sporadic basis; jobs that can only exist because the employers low wages are being subsidised by the taxes of other workers who fund Housing Benefits, Child Tax Credits and so on; and hundreds of thousands of unemployed people who with no hope of a proper job have declared themselves self-employed, but who obtain little income, and little work doing things like window cleaning and gardening. That is at the bottom of the UK's disastrous level of productivity growth.
It is the legacy of the Thatcher/Blair years of building a low wage/high debt economy, where large numbers subsist on appallingly low wages, made up by welfare dependency and borrowing, and where a privileged minority earned huge sums from employment in banking etc. George Osborne unsurprisingly has continued that policy, which is why he continues to bail out the banks and goose the property market to encourage even more debt.

In the US, the picture appears slightly different. In the 1980's and 90's, the US followed a similar course, first under Reagan, and then his successors, including Clinton. Yet, despite the persistence of the old industrial monopolies such as GM, GE, and Ford, the US did begin to develop a new more dynamic, more high value sector of its economy. Not by anywhere near enough to prevent the huge imbalances of trade that built up with the rest of the world, primarily China, but significant nevertheless. Silicon Valley remains the global centre of technology development. Apple has become the world's most valuable company, followed by other technology based companies such as Google and Microsoft. But, its not just computer companies where the US has global leadership.

It has leadership in things like biotechnology and gene technology. It was a US company that was the first to decode the human genome, and that technology is now opening up vast possibilities of whole new commodities and industries based upon it, be it in medicine, or be it in GM crops, or the use of genetically modified organisms to produce fuel, to eat waste and so on. 

Initial Public Offerings of biomedicine companies in the US has jumped to $1.7 billion this year, and these companies offer a range of solutions to diseases like cancer. When the human genome was decoded ten years ago, the cost worked out at around $3 billion per person. Today it costs around $3,000 per person!!! That means that a whole range of medical solutions can now be developed for people tailored specifically around their particular genetic make up.

The importance of that is indicated in the recent GDP numbers for the US, which have been formulated on a revised basis. It now gives more importance to precisely these high value, high profit areas of the economy, for example, a lot of intellectual production, be it for R & D, or for the value of copyrights and patents etc. are classified as investment rather than expenditure. As the cost of capital rises, and interest rates along with it, the basis on which the old inefficient industries continued to survive will be undermined. There will be an added incentive for capital to move towards thee new higher value, higher profit areas.

That will be bad news for those economies like the UK that rely on low wages, and low interest rates, and high levels of debt. Over recent weeks, as the demand for capital has increased relative to supply, global interest rates have started to rise. Over recent days, Ben Bernanke has repeatedly rowed back from the more hawkish stance on interest rates. Yet, despite dovish comments from bernanke that interest rates will stay low until at least 2014, despite similar comments from Mark Carney at the Bank of England, despite repeats of similar comments from Mario Draghi at the ECB, despite Shinzo Abe committing Japan to doubling its money supply, global interest rates continue to rise. They will continue to do so, so long as the demand for money-capital continues to rise relative to the supply of surplus value.

That is a necessary feature of the global rebalancing. Higher interest rates will crash inflated property, bond and stock markets. It will shake out all of the zombie companies, and zombie loans, and zombie jobs. It will mean that capital is diverted to those areas where the rate of profit is high enough to cope with the higher rate of interest, and will thereby create a more healthy basis for economic growth, including the possibility of paying higher wages. Workers should preapre to take advantage of those more propitious conditions when they arise to strengthen their economic and social position, to rebuild their organisations and to build their own alternatives.

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