Sunday, 23 November 2014

The US Economy Is Accelerating

Normally, economic recoveries follow a pattern whereby the initial period of recovery is rapid, and then the pace of growth slows down. The US recovery did have the usual “V” shape, but it now seems that rather than the pace of recovery slowing, it is actually accelerating. The latest survey data from the Philadelphia Federal Reserve, known as the Philly Fed Index, showed a rise from 20.7 in October to 40.8 in November. The last time the index was at that level was in December 1993, but the jump in the index, to nearly double its previous reading, and more than double the 18.3 that analysts had been expecting, is unprecedented. In fact, its so huge that a number of analysts believe it must be wrong. Perhaps so, but its not the only data showing a strengthening US economy.

81% of US companies reporting profits have beaten expectations. That is the fastest pace in four years. US profits in the current earnings season are rising on average by around 12%. In addition, the index of leading indicators, produced by the Conference Board, rose sharply last month. The index gives a forward guide of future growth in the economy. Having risen strongly, by 0.7%, in September, the index rose even more strongly in October, by 0.9%, half as much again as the Reuters consensus estimate of 0.6%.

If the Philly Fed Index is correct, it implies growth in the Fourth Quarter of 2014, in the US, of 6.5%. That would be a sizeable rise, even compared with the 4.6% annualised growth rate, achieved in the second quarter. It would be half as much again as the 3.5% growth rate of the third quarter, and double current estimates of 3.2% for fourth quarter growth.

The report follows on several months during which employment growth has been strong and rising, in the US, and when the unemployment rate has been falling steadily, and is now close to the level considered by the Federal Reserve to constitute full employment. Labour shortages in some sectors have already been manifest, and that has gone along with rising wages in certain parts of the economy, though not generally. The Philly Fed's Employment Index more or less doubled in the last month.

But, not all the economic data shows such strong trends. According to Markit, US factory activity slowed last month. Its Purchasing Managers Index fell from 55.9 in the previous month to 54.7. The main reason seems to have been weakness in US exports. That follows naturally both from the fact that the EU economy has slowed considerably, and the dollar has risen sharply in value in recent months, making US exports less competitive. But, it should be born in mind that, as with all other developed economies, manufacturing today only forms a small part of total GDP. The majority of US GDP is accounted for by service industry.

As I've written previously, the US is likely to suffer the same three year cyclical slow down as other global economies - The three Year Cycle Kicks In.  That has already affected China, Latin America and the EU. The latter is also suffering from the self-imposed damage of austerity measures, as well as from the effects of the economic sanctions imposed on Russia, which barely affect the US economy, but impact heavily on European growth.

The three year cycle does not mean that economies necessarily go into recession, only that they suffer around four quarters of slower growth. Whether that means recession or not depends on the existing strength of economic growth. The UK and EU have not had the strength of economic growth that the US has enjoyed since 2009, because the US continued, during that period, to apply measures of Keynesian fiscal stimulus, whereas the UK, and parts of the EU, have damaged their economies with Hayeckian policies of austerity. The latter economies have, therefore, gone into the three year cycle in an already weakened condition. As I wrote a while ago, the effect of that in the UK is likely to be particularly sharp, because its apparent health is a mirage. The underlying weakness of the economy will, therefore, become more rapidly apparent.

The reason the US economy is accelerating, rather than slowing down, is that although it continued to apply measures of fiscal stimulus after 2009, it too has suffered from the same kind of political crisis that has affected Europe. In the US, the Tea Party, which represents the same kind of far right populism that is manifest in UKIP in Britain, in the FN in France, in the Five Star Movement in Italy and so on, has pushed opposition to fiscal intervention. In the same way that these right-wing parties in Europe have acted as a whip on traditional conservative parties, pushing them further into the adoption of policies of fiscal austerity, and other measures in support of the small capitalists they represent, so the Tea Party has forced the Republicans to adopt a similar fiscally conservative stance.

Republicans in Congress have been forced to oppose any further fiscal stimulus, and Republican controlled state governments have adopted similar positions undermining federal stimulus programmes. In Europe, a political crisis that flows from the failure of social democracy to push through the creation of a United State of Europe, which could apply a single fiscal policy across the union, has encouraged the growing conflict between nation states, and a resultant political crisis. That political crisis is behind the economic weakness of Europe. But, a similar political crisis exists in the US, and has caused similar economic weakness, as repeated conflicts have broken out over the Debt Ceiling, the Budget, and the Sequester, which have threatened to bring the US government to a halt, and have undermined the confidence of businesses and consumers to invest or spend.

The testament to the success of the Keynesian fiscal stimulus adopted after 2009, however, is that it seems to have put in place a sufficient economic basis for the economy to begin to grow, once those political crises have subsided. The effect of the Sequester, which took out a large amount of planned state spending from the start of 2013 has been accommodated within the overall growth of the US economy. A large part of the explanation for the acceleration of growth is that it is the delayed response to that stimulus, and the ending of the political uncertainty that the previous political crises inflicted. Its yet to be seen whether that may return as the Republicans threaten to respond to Obama's executive action over immigration, by using their financial power in Congress.

The underlying basis of this growth is the fact that the global economy continues to be going through the boom phase of a long wave cycle. Indeed, its only because of that fact that Keynesian fiscal stimulus has any possibility of working, by mobilising the huge reserves of available surplus value to cut short cyclical crises. It is an indication of the idiocy of conservative governments that in those conditions, and with interest rates at levels not seen in centuries, because of those reserves of surplus value, they not only fail to adopt such policies, but inflict unnecessary damage on their economies, and on the lives of millions of people by adopting austerian economic policies.

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