"We are in the midst so far of a jobless recovery and a profitless recovery. That is a double whammy on financial markets.", Sung Won Sohn, chief economist at Wells Fargo.
This article was written before the WorldCom scandal and subsequent fall-out on the US and global stock markets. These events underline the weakness of the world economy outlined below.
Deep problems remain for US economy
The popular media has seized upon recent economic reports in order to argue that the US economy has recovered from the recession. Yet unemployment is at its highest level since August 1994. What’s going on with the economy? What does this mean for workers?
Going by official statistics, the Gross Domestic Product (GDP) has grown for two quarters of the year, thus qualifying as an upturn in the economy. But the question is: what kind of an upturn will we see?
The media has focused on a 5.8% growth rate in the GDP for the first quarter of the year. But serious economic commentators report that most of this growth came from companies restocking inventories they cleared out during the recession. This is a one-time-only event. Most serious analysts expect a period of slow growth ahead, at best. According to Bruce Steinberg, chief economist for Merrill Lynch & Co., "the labor market will show only very gradual improvement in 2002. That’s because corporate restructuring activities will continue full force as companies resize themselves for profitability."
The reality is that the conditions for strong, sustained economic growth do not exist. The excesses of the 1990’s – an extremely over-valued stock market, an economy dependent upon overseas borrowing, a squeeze on profits, consumers going into massive debt, overproduction, and the ballooning US trade and current-account deficit – all still remain. Most recessions are accompanied by a fall in consumer spending and a reduction in consumer debt, but that didn’t happen in this recession. Consumers are still burdened with a record level of debt and have no room to increase spending.
Recessions are the capitalist system’s very painful and destructive way of wiping out excess production and debt, in order to re-create conditions for profitable economic activity. Their system demands that plants are closed, that workers are laid off, and that workers lose their savings and pensions when companies like Enron go bankrupt. The bosses demand speed-ups, cuts in health benefits, and cuts in wages (i.e. increased productivity from workers) in order to restore their profit margins.
The 2001 recession failed to restore conditions for profitability for the capitalists. And without that they will not invest. As Sung Won Sohn, chief economist at Wells Fargo, put it, "we are in the midst so far of a jobless recovery and a profitless recovery. That is a double whammy on financial markets."
A major problem is ballooning deficits and debt. The most complete figure to represent this is the current-account deficit. A Federal Reserve Bank study of large current-account deficits in developed economies found that deficits usually reversed themselves when they exceeded 5% of GDP. A correction then occurs with an average fall of 40% in the value of the country’s currency.
The result of a 40% reduction in the dollar would be a sharp reduction of foreign investment, as the falling value of the dollar would make investing in dollars a losing proposition. The government then will either have to slash spending and raise taxes in order to reduce the deficit, and/or sharply raise interest rates. This would drastically reduce consumer and business spending, throwing the US into a new recession.
The US current-account deficit stands today at 4%. At current rates, Morgan Stanley bank predicts that this will reach almost 6% by the end of 2003. At that time the US would need to borrow $2 billion dollars a day just to fund this deficit. "That would be the biggest deficit run by any G7 economy in the past 30 years…History suggests that big current-account deficits always collapse in the end. There is a limit to the willingness of investors to hold ever more dollar assets." (The Economist 4/27/02)
In the year 2001, foreign investors spent $100 billion buying US stocks and bonds, and a further $134 billion in direct investment in US companies. "Nearly two-thirds of some 300 global fund mangers polled by Merrill Lynch & Co. in April considered Wall Street the most overvalued of the world’s top five stock markets." (Business Week 5/20/02)
The US economy is not isolated from trends in the world economy. Mark Azandi of Economy.com explained, "the global economy remains very fragile with troubles in Argentina, Japan mired in decade-long recession and Germany struggling. If something goes badly wrong, it could quickly spread to our economy" (The Washington Post, 4/29/02). The same article also commented "the US largely has avoided the fallout from Argentina’s financial collapse, but that could change if the crisis worsens."
The US economy is wracked by the contradictions of a capitalist system in long-term crisis. The heydays of the 1990’s boom are not about to return. Instead, all the excesses of that boom still plague the economy. There is a strong possibility of the economy now falling back into a new deeper recession.
This article first appeared in the June/August 2002 issue of Justice the paper of Socialist Alternative, the CWI section in the US.