USA: economy teeters on the edge of recession
The feverish boom in stock markets is long over and the related downturn in consumer demand has exposed the mass of excess stocks and collapsed profits. What are the the prospects for recession in the USA?
The world’s biggest and most dynamic economy faces recession. In the last quarter of 2000 all the major graphs that measure the United States’ economy turned downwards. Growth was running at 5 per cent a year in the first half of 2000, at 2 per cent by September and probably 1 per cent now.
Signs of recession are all around. Microsoft, Dell, Hewlett-Packard and Intel all issued profits warnings for 2001. General Motors announced it will slash 20,000 US jobs. Union Pacific railroads is sacking 2,000 workers. Montgomery Ward has sacked 37,000 workers and closed all of its 250 stores.
Up to this point, the USA has enjoyed the longest economic recovery in post war history – nine straight recession-free years. So what’s gone wrong?
The stock market started to slide in April last year and never stopped, destroying 10 per cent of the value of US companies during 2000. NASDAQ, the technology stock market has crashed 50 per cent, taking out many dotcom firms; eToys has seen its share price collapse from $31.50 to 20 cents and is on the verge of bankruptcy.
The destruction of dozens of retail firms is no accident. The steady deflation of the stock market over the last nine months has drained the fuel that kept the economic engine going in the USA.
An astonishing 49 per cent of all US households own stocks. In 1999 when stock markets ballooned household assets soared by $5.5 trillion. Around 5 per cent of this found its way directly into consumer spending on new goods and services, a sector which accounts for two-thirds of all economic growth in the USA.
When the stock market went into steep decline so did, after a time lag, consumer spending. Wages have largely been flat over the last nine years and savings are negative, so there was no room for these to take up the slack.
Falling profits and revenues is leading to a “credit crunch”, a classic harbinger of recession. Companies borrowed heavily in the boom to invest in the belief that the good times would never end. Banks especially fear that they are over-exposed to the high-rolling borrowers in the booming telecoms industry.
According to the Economist, banks have taken a close look at their loan portfolios and turned “white with fear”. Likewise it is becoming harder for corporations to raise money by issuing bonds.
Small privately-owned firms looking to grow by issuing shares (the so called Initial Public Offering or IPO) see the route effectively barred by falling share prices.
The Federal Reserve’s response was a big emergency cut in interest rates. The size and nature of the cuts has led some to think that the Fed is so alarmed by the scale of company indebtedness in the wake of the collapse of profits and market valuations that it could soon be having to bail out a major company in order to avert a slump – as it did with the “too big to fail” US hedge fund Long Term Capital Management in 1998.
While the Fed is likely to reduce interest rates further, in an attempt to engineer a soft landing, the overhanging debt of companies, the high exposure of individuals and investment firms to a still-overvalued stock market, and the persistent sharp falls in operating profits across US corporations are all factors that signal a harder landing.
Naturally, there are reserves left in the world’s only superpower to mitigate the coming recession. Nine years of boom have transformed the Federal government finances and they have turned a huge debt into a major fiscal surplus.
The new Bush administration is pressing hard on Congress to agree a large and swift tax cut to alleviate the burden on corporations. This could help companies deal with their debts or write-off, at a stroke, the cost of plant equipment they are saddled with, thus improving their balance sheets.
An across-the-board tax cut would also help to sustain consumer demand during this coming year. Alternatively, or alongside these measures, the falling value of the US dollar (due to the fact that the US is no longer sucking in the bulk of other countries’ money) could be deliberately boosted by the US administration to engineer a boom in US exports, and so shift the engine of growth and profits away from domestic demand.
Finally and above all the ability of US corporations to off-load the crisis onto its workforce through the swift implementation of mass redundancies is, as in 1990-91, all too evident.
More likely than a big 1929-style crash and sharp slump is that the USA faces a similar fate to that which has beset Japan over the last decade, as it has painfully worked its way through its huge debt bubble.
And the debt bubble is huge. Shares in Wall Street are still over-inflated. Property prices too. Then there is the record level of household debt. All this will take many years to work through. In the place of inflation, a new fear will arise, that of deflation, first hitting Japan, then the rest of the world. Protracted stagnation in the USA alongside Japan would have enormous implications for the rest of the world.
How the US escaped recession in 1998
Three years ago it looked as though “Asian contagion” would pull the US economy down. The financial markets were gripped with palpable fear: the Asian stock market crash of 1997 and currency crisis raised the spectre of a world recession.
• The Federal Reserve lowered the cost of borrowing by cutting interest rates and so helped to avert a credit crunch for businesses effected by the fall-off in demand for US goods in Asia.
• Countries and investment firms that threatened to default were propped up in 1998, most spectacularly by IMF loans to Brazil, Korea, Russia.
• Capital fleeing from the crisis-ridden Asian stock markets arrived on Wall Street. Share prices collapsed 20 per cent in the summer of 1998 because of fears of recession spreading to the USA. But the Fed’s actions and the influx of capital into Wall Street fuelled the share price boom, especially in the over-hyped dotcom sector. By January 1999 they reached an all-time high and continued to set new records until April 2000. The massive stock market boom led to a wave of mergers and acquisitions and investment in new plant and equipment.
• There were sustained improvements in productivity after 1996 as a result of accumulated new technology investments. This did more than anything else to ensure that the massive injection of new money into the US economy during 1998 and 1999 did not lead to a take-off in inflation. The long-term effects of a decade or more of defeats for the US working class made sure that US corporations could suppress real wage growth for most of the 1990s and so turn most of the gains in productivity into a real increase in profits.
Booms give way to bust
The renewed boom in 1999/2000 snatched the USA from the jaws of recession. But despite the claims of some commentators, neither the Federal Reserve’s astute interventions nor the undoubted effect of new technology investments can abolish the business cycle or the underlying causes of capitalist crises.
Understanding the sources of profit in the real economy is the key to understanding crisis. Because capitalist economics exists to cover up the real source – the work of workers – it can’t properly explain or anticipate crisis.
Boom and bust works like this: capitalists invest in technology to maximise their competitive advantage – allowing them to produce cheaper than other capitalists, and either boost profits or increase market share.
This relentless drive to expand profit leads eventually to an over-accumulation of capital; that is, more capital (embodied in plant, equipment and stocks) exists than can be sold in an already glutted market place at a price that realises the profits locked up in them.
This is what happened in Asia in 1997, after six feverish years when that region attracted 40 per cent of all the world’s capital investments. Eventually, debts piled up by firms and governments in order to carry on investing could not be repaid given the fall off in sales due to a saturated market for computers, white goods and cars. So investors and banks withdrew their money leading to a collapse in firms and currencies.
Now this is happening in the USA. Massive overinvestment and profits over the last years were sustainable as long as an inflated stock market could boost demand and sustain prices. Now this period is over.
Who is to blame?
Who are the capitalists going to blame for the looming recession? Normally they rail against excessive wage demands or “restrictive labour practices” of the workers. But in the USA union rights and membership have been squeezed for decades and despite low levels of unemployment, wage demands have been surprisingly moderate, even by the admission of the capitalists themselves.
Or maybe they can blame greedy Arabs for the rise in the oil price? In 1990 they offloaded the US recession onto the effect of an oil price rise after Iraq invaded Kuwait. In fact very low oil prices ($18 a barrel) until late 1998 helped fuel the expansion and kept inflation in check.
Even when it rose to $32 a barrel months ago, this was after the stock markets turned down. The recession is now looming and the balance sheets of the big companies are getting worse even as oil prices are back down to $25 a barrel and less.
The scapegoats will be harder to find this time. The triumph of Thatcher and Reagan, encapsulated by the doctrine of neo-liberalism, has now enveloped the whole world economy, even those in the former Soviet Union.
Capitalism has been functioning in a purer form than it has enjoyed for more than a century. If capitalism has managed to function in such an ideal form, then it is going to be difficult avoiding the accusation that there is something fundamentally wrong with it, that it has only itself to blame for its crisis..
The coming recession will also throw the debate on globalisation into new focus. During the eleven year period of growth the debate on globalisation has been framed by the assumption that globalisation brings growth.
As recession kicks-in, outside the USA, national governments will find they have far fewer levers to pull to soften the blow.
The assumption that capitalism equals growth, rising incomes, technology innovation and full employment will be seen as an illusion created by special circumstances and self-interested US economic policy.
US capitalism: markets in denial (pdf) [Trotskyist International 25, 1999]
Modern capitalism and crisis theory [Trotskyist International 25, 1999]