The US economy has now been officially in ‘recovery’ mode for 15 months, according to this week’s pronouncement from the Business Cycle Dating Committee of the US National Bureau of Economic Research, which this week formally pronounced that the longest and deepest recession since the end of World War II ended last June.
Over the first year of this ‘recovery’, the US economy has grown by 3.0%. That’s less than half the average growth rate recorded over the corresponding period of the ten previous recoveries in the post-war period. And more than two thirds of that growth has come from the rebuilding of inventories (that were aggressively reduced during and after the financial crisis which precipitated the recession) and from federal government spending. Neither of these can be counted on to sustain the recovery indefinitely. Businesses aren’t going to keep piling up stocks in the absence of a pick-up in sales. And the federal government’s dire budgetary position limits the extent to which it can continue to support economic growth.
The business sector as a whole hasn’t done too badly during the current recovery. After-tax corporate profits rose by 24.3% in real terms over the four quarters to June this year, not too far below the average for the corresponding period of previous recoveries. Likewise the 5.3% real increase in business investment over this period is not too far below the post-war norm, and actually stronger than over the same period following the recessions of the early 1990s and after the ‘tech wreck’.
However businesses have been much more reticent about creating new jobs. Based on the average rate of employment growth over the first year of previous cycles, over 3 million new jobs ‘should’ have been generated since June last year. In fact, even though employment has been rising slowly since January, it is still more than 300,000 below where it was when the recession ‘officially’ ended.
This unusual weakness in job creation is the major reason not only for the slow progress in lowering the overall unemployment rate (which has fallen by only half of one percentage point from its peak late last year of 10.1%), but also for the on-going increase in long-term unemployment, which is in turn raising longer-term concerns about the US’ potential growth rate, given that (as in Australia) the longer a person has been unemployed, the less likely he or she is to find employment even when labour market conditions have improved considerably.
Sluggish employment growth has also been a major contributor to unusually weak growth in household income for this stage of the recovery. On average over the first four quarters of previous post-war economic recoveries, real household disposable income has risen by 5.5%. This time around, it has grown by just 0.3%. And households are saving a higher proportion of their incomes than at any time since the early 1990s, in order to pay down debt. Hence the recovery in consumer spending has also been unusually weak, rising by just 1.7% since June last year compared with an average increase of 5.1% over the first year of previous post-war recoveries.
Together with the continued weakness in housing activity (reflecting the over-supply of housing which helped precipitate the financial crisis and a more restricted supply of mortgage finance since the crisis), this weakness in household spending has been the main reason why overall economic growth has thus far fallen so far short of what history would have led one to expect.
Indeed the only major component of economic activity which has exceeded historic norms has been exports, which have grown by 14% in real terms since the recession officially ended. But since imports have grown even more rapidly (and from a much larger base), in net terms trade has continued to detract from US economic growth.
None of this necessarily means that a so-called ‘double-dip’ recession – in which overall economic growth turns negative again – is inevitable.
It is possible that the housing sector could experience a renewed downturn, given the weakness that various leading indicators of housing activity have shown since the expiry of various government support measures (including a tax credit for first-time buyers similar in effect to Australia’s First Home Owners’ Grant scheme) around the middle of the year. But housing activity has already shrunk so much – it now accounts for little more than 2.5% of GDP, compared with over 6% at its peak in 2005 (and with about 5.5% currently in Australia) – that another downturn in this sector would have a considerably smaller impact on overall economic growth than it did between 2006 and 2009.
However there are few signs in any other recent data releases to suggest that the broader US economy has slipped back into recession in the quarter that is about to end, or will do so in the December quarter.
In the absence of another major financial shock – and there’s no suggestion of one on the horizon – it seems more likely that the US economy will continue to crawl along at a sluggish pace, until the process of household de-leveraging has reached a point where consumers are willing to start spending more rapidly again, or until businesses become sufficiently confident about the economic outlook to step up the rate of new job creation. And there’s not much that either monetary or fiscal policy can do to accelerate that process – although nor should they inadvertently prolong it by starting to tighten policy prematurely.
Given the diminishing importance of the US economy to Australia, and the corresponding increasing importance of the Chinese economy, both of which were neatly captured in a chart presented by RBA Assistant Governor Phillip Lowe at this month’s Natstats conference in Sydney, this prospect doesn’t matter as much to Australia as it once would have done. But with the markets now convinced that Australian interest rates are set to rise again before Christmas, it will keep upward pressure on the Australian dollar.
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