US Economy

It is very tempting to refer to last week's fall in US GDP, for the first quarter, and to blame it, directly, on Trump's imposition of tariffs, which act as a tax on US consumers' purchases of imported goods. Tempting, because it is what Trump himself does with data, blaming any bad news on Biden's regime, and claiming any good news for himself. He's already claimed that the stock market falls of previous weeks are, somehow, the fault of Biden, or else of his own appointee, Jerome Powell, at the Federal Reserve, for not cutting interest rates. But, the fall of US GDP, in the first quarter, of 0.3%, was not a sign that the US economy had actually, already begun to shrink. It simply reflects the fact that US importers had tried to avoid the introduction of Trump's tariffs, by bringing forward their deliveries.

In the last couple of weeks, I pointed out that, for example, Jaguar, in Britain, had significantly increased its exports to the US, which is the other side to this large rise in imports of the US. In the US, it has given a spurious figure for the state of the economy, and it did the same, but opposite thing in relation to the UK economy. In relation to GDP, exports count as an addition, whilst imports count as a deduction. GDP is, basically a measure of the value of goods and services produced and sold, for personal consumption. If we take Marx's reproduction schemas, in Chapter 20 of Capital II, it is the equivalent of Department II, output. As Marx sets out, it is not a measure of the total output of an economy, in a year, because it does not include the value of the much larger Department I. It is a measure, only, of the new value created by labour during the year, which resolves into revenues (wages, rent, interest, taxes and profit of enterprise). It is these revenues that are used to buy consumer goods and services, i.e. the output of Department II. Its on this basis, as Marx sets out against Adam Smith's absurd dogma, that National Income is equated with GDP.

As Marx sets out in Capital II, Chapter 21, this has to be modified slightly, in considering the reality of extended reproduction, because, then, a part of production, a fraction of the produced surplus value, goes not to fund the unproductive consumption of the exploiting classes, but goes to fund capital accumulation. As he sets out, this is quite different to the reproduction of the consumed constant capital, which is replaced, "on a like for like basis", out of current production, and so has no revenue equivalent, i.e. it is not bought out of any revenue, in the current year.

So, GDP, which attempts to measure the new value component of output, in the current year, measures the value added component of commodities sold during the year. In the case of simple reproduction, i.e. no capital accumulation, those commodities are bought for personal consumption, out of revenues, hence the equivalence of GDP with National Income, or as Marx sets it out, Department II output, equals Department I wages and profits, plus Department II wages and profits. However, if you are calculating GDP on the basis of goods and services sold, anything that has been produced during the year, but which is sold in some other country, would not be included, so the value of exports has to be added back. Similarly, commodities that are bought, but which have been produced in some other economy, have to be deducted.

So, the fact that the US sucked in large amounts of imports ahead of the imposition of Trump's tariffs, explains why US GDP, is seen, superficially, to have shrunk in the first quarter. As imports shrink substantially, in the next months, both as a result of those acquired inventories being run down, and as a result of Trump's tariffs making many imported goods unsaleable, in the US, that effect will be reversed. But, of course, that will not be the end of things. For other economies, whether this coming inability to sell their commodities at prices that are profitable, in the US, means that they suffer a decline in their own output, will depend upon how much of that output was exported to the US, and whether, as the US cuts itself adrift, other economies simply increase their trading relations with each other to replace it.

Its often said that, if China can't export to the US, it will then seek to “dump” its excess output on Europe, for example. But, that is not necessarily true. The US accounts for 15% of Chinese exports, or 2.5% of its GDP. In conditions where China is already the largest market for many commodities, and where the Chinese state needs to, also, raise the standard of living of Chinese workers, it is quite possible for China to absorb a large part of its US exports into domestic consumption. But, also, China has replaced its imports of US agricultural products, in response to Trump's tariffs, by importing more from Brazil and elsewhere. That strengthens growth in these other economies, and enables them to be able to, also, buy more Chinese manufactured products.

The problem for the US economy is that it imports so much of what it consumes (productively or personally), and so, when Trump imposes huge tariffs on those imports, to a level that make it impossible to export to the US, the effect is to a) empty the shelves of retailers, and b) break the supply chains of US producers. As shelves empty at Wal-Mart, which gets 60% of its stuff from China, the first reaction will be panic buying, as seen during lockdowns. With US consumers still with money to spend, the second reaction will be rapidly rising prices of those things still available, because, with Trump, also, imposing tariffs on imports from other countries, retailers will not be able to simply switch to other suppliers.

The same is true in relation to US producers. They, also, get large amounts of the raw materials and components they require from other countries. Trump's tariffs, increase the price, in the US, of all those imported materials and components, and so, also, increase the cost of production, and so price, of US goods and services too. That is where they can even continue to be produced. Where Trump's tariffs make it impossible for some other country to profitably export to the US, it will simply stop, and look for other markets for those exports, which means that US producers will find that they simply can't get the materials and components they require. That is part of what happened with Brexit, as companies, in the EU, simply found that the costs of exporting to the UK, with all of the added red tape resulting from Brexit, made it no longer worthwhile.

Trump has already had to face up to the reality of that. The tariffs he imposed on Canada, for example, meant that US farmers were faced with a massive rise in the price of the fertiliser they imported from Canada, to an extent that it would have been unsustainable. Trump had to back down. The same has been true with his tariffs on imported steel and aluminium, which are important components of car and aerospace production. He has had to give US producers a rebate on the 25% tariffs on steel and aluminium he imposed. Similarly, he had to reverse his position on tariffs on electronic components and products, as the US imports 60% of its microchips from China, and it, also, faced the shelves of its stores emptying of electronic products.

As with Brexit, Trump's plans for economic nationalism, for “taking back control”, and sealing its borders, are simply unworkable. They will, inevitably, fail, although, as with Brexit, in the process, they will cause chaos and economic self-harm. As with all of the existing capitulations by Trump, we are likely to see more and more of his tariffs abandoned, but, as Steve Leisman, on CNBC, has noted, it may already be too late to avoid the damage to US supply chains that have been caused by Trump's tariffs.

What can be seen, however, in the state of the US economy, as it is now, and not how it might be in coming months, depending upon how quickly Trump's tariffs are dropped, and how quickly those supply chains can be restored, is that, despite the superficial appearance from the GDP figure, the US economy remains buoyant, and, in particular, the US labour market is robust.

Retail sales in the US, in March, rose by 1.4%, month on month, ahead of forecasts of 1.3%, and the figure of 0.2% the previous month. It is ahead of the average figure for the previous year, and reflects the fact that consumers also sought to get ahead of the imposition of Trump's tariffs, and the inevitable increase in prices resulting from them. In coming months, Trump's tariffs will cause prices to rise, in the US, because of higher costs, and increasingly as a result of actual shortages of supply, as happened with lockdowns, and particularly the lifting of lockdown, when supply could not respond quickly. But, with existing labour shortages, as I have set out previously, US consumers will respond, not by curtailing demand, but by paying the higher prices, and simply seeking higher wages to compensate.

The US unemployment rate remained at 4.2% in April, indicating the continued tightness of labour markets. What is more, the data shows that employment grew by 436,000. As I have set out previously, even without a rise in hourly wages, or growth in the number of hours worked, this steady rise in the number employed, the rise in the number of people within households employed, or else, moving from part-time to full-time employment, increases the amount of wages available for consumption, and so raises the demand for wage goods, which firms must respond to. In conditions, like those, now, where prices are rising as a result of Trump's tariffs, the consequence is not a reduction in consumption, but a compensating rise in wages. A look at the other underlying data shows that the participation rate moved up slightly to 62.6% from 62.5%, meaning that some of those of working age, who, previously, were not actively seeking employment, have found it worthwhile doing so. That is also reflected in the decline of the U-6 unemployment rate to 7.8% from 7.9%. U-6, basically measures underemployment.

In April, US non-farm payrolls increased by 177,000, compared to estimates of only 130,000. Initial jobless claims are volatile on a week by week basis, but, on a four week moving average, are at just 226,000. That is despite all of the actions of DOGE to fire federal employees. It is a long way from the sort of figure of around 400,000 seen at times when the US economy is entering a recession. That is not to say that, if Trump presses ahead with his Brexit style plans for autarky, that will not happen, as the damage done to the economy sends it into recession, but that is not the case, currently.   If the US slows down, from here in, it will be all down to Trump.  As Boris Johnson found with Brexit, the economic reality meant that he could not “Get Brexit Done”, other than in name only, and that, even to avoid further damage to the UK, than the 4% drop in GDP that resulted from Brexit, he had to abide by EU Single Market and Customs Union rules. Trump has, similarly, had to capitulate on his tariffs.

So, in the coming months, the basic outline is that the US will face rising costs of production, and rising prices, as a result of Trump's tariffs. But, consequently, Trump will repeatedly have to capitulate and remove the tariffs, as his crude attempts to use them fail. Their main effect will be to cause disruption and uncertainty, which itself represents a cost to the US economy, as well as causing a lack of confidence in US financial assets, as seen in the volatility in recent weeks on its stock and bond markets, as well as in relation to the Dollar. Rising costs for US businesses will mean rising prices, which will be facilitated by the existence of commercial credit, and, although the Federal Reserve is unlikely to cut interest rates, there is ample liquidity to facilitate rising pries. Despite the rising prices, the rate of profit itself will fall, because the same amount of profit is measured against a larger amount of advanced capital.

But, rising wages, in response to rising prices, and a shortage of labour, will, also, then, mean that the rate of surplus value falls, reducing the rate of profit further. The Federal Reserve may well have to facilitate further price rises, to counter that, creating an inflationary spiral of rising prices, followed by rising wages.