US economy: “Recovery†or temporary blib?

Politicians and economists have been trumpeting the "recovery" in the US economy, heralding it as the sign of a new period of growth for the world economy.

Third quarter (2003) growth rates for the US of over 8%, the highest in 20 years, factory orders of levels not seen since July 1950, and a halt to rising unemployment are being seen as indicators that the US economy has entered a new period of boom. It’s early days yet; more data over a longer period is needed before their claims can be justified.

The Bush administration assisted by the US Federal Reserve have pursued an economic "strategy" based on massive tax cuts and a weak US dollar in an attempt to stimulate the flagging US economy in time for November’s presidential elections. However, whereas these economic measures may temporarily "boost" the economy and give the impression of a healthy state of affairs the reality is very different.

Bush’s policies in the long-term will only multiply and worsen the structural problems in the US economy. The US trade gap for 2003 will reach $500 billion, as will the federal budget shortfall, and the nation is $4 trillion in debt!

Under capitalism there are typically two ways to cut a current account deficit. One is a recession in which consumption falls, investment falls and so fewer goods and services are imported. Another is currency devaluation so that exports become cheaper on world markets, imports more expensive and gradually the trade deficit shrinks.

It seems that the US government and the Federal Reserve have deliberately allowed the dollar to fall in value against the world’s other main currencies in an attempt to cut the current account deficit (trade gap) and give a boost to US manufacturing industry. The dollar may soon be valued against the euro at $1.30, a 15% fall in the last two months, and it has reached $1.82 against sterling in an 11 year low.

The aim of this "devaluation" of the dollar is to make US exports cheaper and foreign imports more expensive. Hence exports increase, imports fall, the trade gap is narrowed and US manufacturing industry increases production, jobs are created and to follow their logic – George W Bush is re-elected.

The falling popularity of the Bush administration in the last 12 months has not just been because of the war and occupation of Iraq. 2.6 million jobs have been lost in the US over the last three years, and there have been major cuts in state funding for health and education. Global Insight Inc. has calculated that the dollar’s decline has saved up to 700,000 manufacturing jobs. Although manufacturing orders are up, there is no sign yet that employment is increasing, rather overtime is being increased as the capitalist owners wait to see if the recovery in the economy is real.

The devaluation strategy may not pan out as the Bush Government would like it to. Third quarter economic growth may yet turn out to be a temporary blip. "Not all recent economic news has been positive. Last month’s orders for durable goods were down. Housing sales and consumer confidence figures fell below expectations, leading to concerns that the recent economic strength might be temporary and more the result of short-term stimulus measures such as tax cuts" Washington Post 3 January 2004.

US manufacturing is not able to fill its current order books, and imports are still being sucked into the economy fueled by tax cuts and equity withdrawal (borrowing against the increased value of property, shares and bonds). This may cause the conditions for a rise in inflation, as imports from Europe and Asia cost more, as the dollar declines in value. This will also lead to increased energy costs as oil imports to the US will cost more.

An increase in inflation may force the Federal Reserve to switch tactics and increase interest rates. This would have a knock on effect of cutting consumer spending as mortgages and debt repayments increase thus slowing or even halting the economic "recovery". Increased interest rates will have a major impact on the American working class, as it will cause the Federal debt repayments to increase and lead to more public spending cuts along with an increase in unemployment.

A weak dollar is bad news for European and Asian capitalism. Growth in these economies has been dependant on exports to the US. Now that their exports to the US are more expensive, it raises the prospect of declining growth rates and job losses. It is even possible that European and Japanese Governments may intervene to buy dollars to halt its continued decline.

It is still unclear whether the "recovery" in the US economy is a temporary blip, what is clear is that the US cannot continue to sustain the world economy based on an ever-increasing trade gap and massive unprecedented debt.

Editorial from Socialist Voice, paper of the Socialist Party, cwi in Ireland

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January 2004