By Tom Harris 9 Aug 2010 [0 Comments | 427 views]
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The last few days have seen growing evidence that the recovery in the US economy is heading for reverse; while Europe has been busy confounding sceptics, and green shots are growing where there was supposed to have been nothing but weeds.
The news from the US seems to be going from bad to worse. The end of July saw evidence that US consumer confidence was in some kind of death roll; evidence is growing that the US housing market seems to be on the brink of another crash; while the Purchasing Managers Index from ISM, tracking manufacturing, fell again in July. This index has fallen by a nasty looking five points since April. See our economic snapshot for a summary:
But Friday topped it all. US non-farm payroll numbers fell by 131,000 in June. This followed a 221,000 drop the month before.
But it is a puzzle. Sure, the Purchasing Managers Index has fallen, but bear in mind it fell from an exceptionally high level. Even June’s much lower reading was consistent with growth of 4 per cent in the US economy. Meanwhile, the ISM index tracking non-manufacturing rose in June.
The problem in the US is not business related at all. The US private sector actually put on 71,000 jobs in the month; it’s just that the gain was swamped by job losses in the public sector, especially local government.
And that’s Uncle Sam’s problem. Local government is in a mess. The national fiscal deficit is ballooning. and is set to balloon a lot further. Yet despite the enormous levels of the US government’s borrowing, it is still being forced to lay off workers.
Just supposing Mr Obama was to take a leaf out of David Cameron’s book, or follow Germany’s lead, and make sweeping cuts; the job losses would be simply terrifying. Sure, it is more likely than not the US will avoid a double dip recession either this year or next. But then again, Uncle Sam is only managing to avoid this fate by running ever growing levels of debt.
It is a re-run of the 1930s. The government tried to solve the problem by stimulus packages such as the New Deal. The look back on that period and say the New Deal didn’t go nearly far enough. The monetarists said the New Deal was an irrelevance, and what the US should have done was boosted the money supply. The Austrian school of economists said neither was right, that the economic cycle is eternal, that the economy would have fixed itself naturally if the government had left things alone, but that the New Deal just made things worse.
Eighty years on the debate has not changed. The likes of Paul Krugman call for more spending, arguing that the cause of Uncle Sam’s problems is that investors are too cautious and are throwing their money at US government bonds. He says it is therefore the government’s duty to use this money that the markets are so keen to lend to it, to stimulate the economy. The other side of the debate argues now is the time to mirror Cameron and make sweeping cuts. This side says the public sector is crowding out business.
Meanwhile, in Germany, the land of prudence, things are looking up. The Purchasing Managers Index for German manufacturing has just hit a three-year high. In France, the land of reluctant fiscal cuts, where social unrest is growing as the terrible truth dawns that the retirement age may need to rise from 21, and that school leavers may have to work for a few years before they retire, the Purchasing Managers Index for manufacturing has hit a 44-month high.
And returning to Germany, industrial production rose 10.9 per cent in the year to June; an impressive growth rate indeed. The latest set of GDP figures for Germany and the Eurozone is due out this week, and economists are hoping for great things from the German figures.
And yet, Germany’s problem is still the same. Still she relies on other countries spending more than they really can afford to prop up her export sector.
Sure, Germany’s industrial production is up on an annual basis, but look closer and things are not quite so good. Month on month, Germany’s industrial production contracted 0.6 per cent in June. It is possible that the US economy is running just a few months ahead of Germany, and just as the US boom of Q4 has ended, so too may Germany’s boom in the quarters ahead later this year.
