Did you hear that? Was that the sound of the fat lady singing? Is it over? Has the great economic crisis of the late noughties turned out to be nothing more than the mild blip of 2008? Yesterday saw the release of revised official data on US economic growth. And the data says the US expanded at an annualised rate of 3.3 per cent in the second quarter. This compares with the original estimate of 1.9 per cent expansion. And the markets loved it; the Dow soared 212 points and at close of play yesterday stood 500 points up on the August low. To put these latest figures in perspective, anything between 2.5 and 3.5 per cent is considered to be on par with the historical trend – so actually it appears that the second quarter saw growth at the upper end of what is considered to be sustainable.
So the bulls come out to play, and the optimists look smug and say “told you” everything was fine really, but maybe the real lesson from this announcement and the way it was so warmly received is that the markets still haven’t got it. Their heads remained buried in the sand, oblivious to the deeper forces at work.
There were two reasons for the startling US performance. Firstly, US exports soared during the period. The data suggests exports shot up 13.2 per cent, while imports fell by 7.6 per cent. Put that together, and the number crunchers say external demand added 3.1 per cent to GDP, accounting for all but just 0.2 percentage points of the expansion.
This is how it is supposed to be. The big hope for the US has long been that she can export her way out of trouble. But, as has been argued here before, it is quite naive to assume that the world’s largest economy can change from a net importer to a net exporter without there being a massive hit on the rest of the economy.
But it takes time for this hit to be felt. Already the Eurozone has paid the price for US growth, by seeing its economy contract in the second quarter. Don’t expect demand from the Eurozone and the UK for US goods to be so great in the next quarter. Don’t expect Japan, China and the rest of Asia to keep buying goods ‘made in the USA.’ If they do this for any significant time period, their own economies will slow dramatically. It really is debatable whether the world can afford to see Uncle Sam become its big supplier instead of big customer.
It seems that the changing dynamics in the US will hit the global economy, which in turn will hit the US.
And we have already seen the early stages of this occur on the currency markets. Currency traders have already grasped the point that the account between the US and Europe had swung too far in one direction – that is why the dollar has risen so rapidly in recent weeks. Inevitably, this will hit US exports hard in the next quarter.
The second reason to believe the figures for the second quarter may not be all they are cracked up to be is simply this. Uncle Sam handed out a massive tax credit during the quarter. And as CNN Money quoted David Wyss, chief economist with Standard & Poor’s as saying: “Mostly what this report will say is, when you give somebody an $1,800 check, he spends it.”
The facts are simply these: US house prices are still falling. The massive inventory levels of unsold properties mean this will continue for some time. US consumers are in too much debt. US banks continue to make massive losses.
In a way it may have been better if US consumers had saved the tax rebate, or used it to pay off some of their debts – it may not have helped the Q2 figures, but at least it would have seen the US in better shape for a final, sustainable recovery.
And that brings us around to the real concern. Markets still have not got their heads around the deeper problems afflicting the US; US consumers, it appears, have still not learned the lesson of thrift. Until these things happen, the real US recovery can not begin. Reality may not be pleasant, but until it is faced, the real fix can not be found.
© Investment & Business News 2013