The US Economy at Mid-Year

On the face of it, a 3.1% 2019 first-quarter increase in US Gross Domestic Product (GDP) is a pretty impressive performance, especially after a drop in the last quarter of 2018 to a less impressive 2.2% growth rate. Couple that with the best January-through-June stock market performance since 1997 and it is understandable that the Trump administration is making the celebration of a healthy economy the centerpiece of its re-election push. But, as I’ve stressed before, the stock market numbers, GDP growth, and even employment rates are often less than reliable measures of the health of the economy, even less so of the economic status of working people. 

But even by market-adulation standards, the 3.1% growth rate is deceptive, masking serious looming issues. A full .56% contribution to the rate comes from inventory build-up, an ominous sign that production is substantially outpacing sales. In addition, the biggest component of 1st-quarter growth was, as usual, consumer spending. But consumer-spending growth retreated by over 50% from the last quarter of 2018. 

A big contributor to 1st-quarter growth was fixed nonresidential investments. Business investments recovered somewhat in 2018 after a long investment drought thanks to favorable tax laws, repatriated profits, and the need to counter growing aggregate worker compensation from a tightening labor market. Early in 2018, corporate leaders and economic commentators began to notice and fear the effect upon profits of compensation growth and sluggish global markets.

In an attempt to counter wage pressure, US capitalists accelerated their acquisition of labor-saving capital and intensified the labor process (increased labor exploitation). As a result, for the first time in 32 straight quarters, labor productivity rose in 2018 above the previous years of sub-2% growth (only to falter again in 2019). 

While cheerleaders were loudly celebrating a healthy economy, both profit-squeeze and declining demand were eating away at the US economy: in the last quarter of 2018, profits fell .4%; in the first quarter of 2019, the decline increased to 2.6% (BEA). 

While the anointed economic “experts” populating most newspapers boasted of prosperity, the serious analysts in capital’s mouthpieces-- The Economist, Bloomberg News, The Financial Times, Barron’s, The Wall Street Journal, etc.-- shuddered. They understood that the decline in profitability-- capital’s engine-- outweighs the cosmetic metrics favored by capital’s Pollyannas. 

For some time, the European, Japanese, and Chinese economies have been mired in stagnation or slowing growth, but the US economy has been puttering along against that tide. That “success”-- fueled by tax policy, military spending, and bullying trade policy-- has now run its course.

The important US auto industry declined every month in the first half of 2019 against the same month last year. June sales dropped a stunning 6% against June, 2018. GM plans to close 5 plants and Ford is scheduling a 20% layoff of its European workforce in July.

US existing home sales-- equally economic drivers-- have fallen on an annual basis for 15 months, and homeownership, after two years of improvement, declined in the first quarter of 2019.

Where there are sales, house-flipping has returned with a vengeance to 2006 (pre-crisis) levels at 10.6% of all sales, spurring class and race-busting urban gentrification.

Steel mill closings are part of a US manufacturing-output decline over the first four months of 2019.

On the dominating financial front, US corporate debt at 46% of GDP is the highest on record. The low interest-rate environment existing since the worst days of the crisis has seduced corporations into promiscuous borrowing. The Federal Reserve is caught in a precarious position of trying to restore interest rates to historical levels in an effort to tame borrowing while fearing that higher interest rates will sink over-leveraged corporations. Trump stands on the sidelines screaming for low interest rates to brighten prospects for his immediate political future. 

The Fed is warning of risky, highly leveraged corporate debt which rose 20% last year to $1.1 trillion (with falling credit standards). A downturn could devastate this market and spark a financial meltdown. 

The low-interest environment has spawned an explosion of global debt: where total debt was 225% of worldwide GDP in 2000, it has reached 325% of total global GDP today. The lowest level of investment-grade bonds now total over $2 trillion.

The heralded burst of international trade that came to be called “globalization” is receding in importance as a factor in the global economy. The period in the 1960-1970s when the WWII “losers,” especially Japan and the Federal Republic of Germany, rose up to compete vigorously with US monopolies managed to nearly double global trade as a percent of world GDP. The percentage of trade to global GDP multiplied again from the mid-1990s until the 2008 crash-- this time, from the development of new logistical technologies and a massive injection of disciplined, skilled, low-wage labor into the global labor market from Asia and Eastern Europe.  

The conditions for continued intense trade growth have now been exhausted in the post-crash world. Since 2012, the change in world merchandise trade volume has vacillated between 1 to 5% growth, actually falling into negative territory in the first six months of 2019. Shipping companies have looked to other areas of investment while orders for new ships-- the vessels of global trade-- have sunk to a 15-year low.  

Some will blame Trump’s trade policies on the decline in trade, but that confuses cause with effect. Economic nationalism as a policy has gained its hold on sections of the ruling class and desperate voters worldwide because of the failure of the globalist project. Its failure to deliver in the wake of the 2007-8 crash produced a hunger for an alternative. Turning to national interest Über Alles at a time of economic chaos is a capitalist commonplace with many historical precedents. In fact, I projected at the time of the crisis that the collapse would likely generate “centrifugal forces” which have since threatened to break up alliances, trade agreements, international institutions (like the EU), and common policies.

In place of the globalist project, the new nationalists hope to revive the US economy by bullying rival economies to the advantage of their respective corporations and capitalists. In the case of the US, they see deregulated markets as failing to respect US power and dominance. They have cast off the fantasy of market partnership for an economic struggle of winners and losers (with each nationalist regime convinced that it will be a winner).

Make no mistake, the current battles between the globalists and the economic nationalists will generate no authentic champions for working people. Neither Trump and his European cohorts nor the free marketeers defending the old consensus can offer little more than temporary relief from the deeper ills afflicting capitalism. 

Apart from tariff policies and other bullying, US oil and gas imperialism is another feature of the new economic nationalism. With US oil production matching or exceeding every other global producer, and with natural gas extraction growing dramatically, the economic nationalists foresee the US now competing successfully for markets. The conventional explanation of the US aggression against oil-producing states must now be retired. The US is no longer solely obsessed with commanding and dominating existing oil producers-- US intervention is not simply about the oil in the way it has been in the past. That is, it is not simply acquiring oil resources that motivates US aggression, but commanding oil markets as well.

Thus, the US is also out to wreck competing oil and gas producers by sanctions, disruptions, and destruction. The US corporations want the markets in order to peddle their own energy resources. The long trail of wrecked, dysfunctional, and economically strangled global oil producers attests to this new motivation and serves US energy corporations well. 

I have been writing often of this shift of US imperial design for over two years. Nothing demonstrates the intent of the new energy imperialism as does the Department of Energy’s recent renaming of US natural gas as “Freedom Gas” and the product as “molecules of freedom.” This silly branding is part of the campaign to win Europe and other gas-dependent markets from Russia and Iran/Qatar. Even though US liquified “freedom gas” is 20% more expensive than Russian gas, the Trump administration bullied Germany’s Angela Merkel to agree to two new LNG terminals in Germany. Her admission that LNG from the US would not break even for at least a decade demonstrates the aggressive face of the new US energy imperialism.

US gas producers have stoked anti-Russia sentiment to draw Poland and the Baltic states into their LNG market nexus. US LNG annual exports to Portugal and Spain grew from a tiny base to nearly 20 and 30 billion cubic feet, respectively, between 2016 and 2017.

And US crude oil exports soared after the crisis in the Straits of Hormuz. US oil shipping nearly doubled in the aftermath of the mysterious “attacks” in the Persian Gulf. President Trump underscored the attractiveness of foregoing the Straits and buying from the US. Rather than taking the “dangerous journey,” Japan and PRChina should be reminded that “the US has just become (by far) the largest producer of energy in the world.”

Economic nationalism will not save the US or any other country from the failures of capitalism.

It is useful to be reminded that the celebrated US economy has left a quarter of all citizens with no retirement savings at all, according to a Federal Reserve survey. Forty-four percent fear that their retirement will not be enough. Seventeen percent state that they will not be able to meet all of their bills in the month of the survey. A quarter of those surveyed skipped medical care in 2018 because they were unable to pay. And nearly 40% state that they lacked the cash to cover a $400 expense. No wonder household debt hit $13.3 trillion last year, a level unseen since before the crash. It is impossible to craft a picture of a healthy or beneficent economy from this data.

Not surprisingly, Black workers have been hit hardest by the bogus recovery. While all workers have improved their median weekly earnings by 5.3% since the beginning of the recession in 2007, African-American workers have barely gained at all, improving their weekly earnings by only 1.6%.

Neither sanctions, tariffs, and other forms of bullying nor an aggressive imperialist energy policy will counter the contradictions ripening within global capitalism. In November of 2018, I wrote: “Next year will bring stagnation, if not economic decline, for the global as well as the US economy. Inevitably, capitalism will attempt to place the burden of the system’s failure onto the backs of working people.” I stand by that projection.

Greg Godels
zzsblogml@gmail.com

THE US ECONOMY: A MID-YEAR REPORT CARD

It's no secret that investors are frightened. A fog of uncertainty hangs over US equity markets, with Wall Street mavens reassuring each other that the course ahead is promising. Activity is down and performance volatile, with institutional investors and fast traders catching small waves at the end of trading days. Fear over Greek negotiations and a possible Federal Reserve increase in interest rates haunt the investment banks, fund managers, and other institutional investors.

US commentators hopefully hail any modestly positive economic news-- an encouraging employment gain here, a small spike in consumer spending there. At the same time, they are deathly afraid of a dampening interest rate hike. Frequent bad news -- like the first-quarter drop in GDP in three of the last five years -- is either dismissed as weather related or conveniently attributed to other non-systemic factors.

Cautious, wary signals crop up in newspaper headlines: “Postcrisis Financial-System Risk Casts a Darkening Shadow” (WSJ, 4-9-15), “A World Awash in Almost Everything” (WSJ. 4-25/26-15), “Tech Investors See the Froth, but None Dare Call It a Bubble” (NYT, 5-25-15). Warnings about “bloated” stocks by the Fed chairman, and alarm over declines in business investment, industrial production and worker productivity, all cast a shadow over the cheer leading of stock purchase evangelists and other financial hucksters.

And then there is the eccentric David Stockman-- President Reagan's former budget director-- who makes a convincing case regularly that the sky is falling. He forewarns:

What is coming, therefore, is not their father’s inflationary spiral, but an unprecedented and epochal global deflation...

What ultimately stops today’s new style central bank credit cycle, therefore, is bursting financial bubbles.

That has already happened twice this century. A third proof of the case looks to be just around the corner. (4-5-15)

Where Are We Headed?

Despite riding a lucky hunch before the 2008 crash, I believe Marxists should avoid the speculative temptation of announcing impending crashes. The fashionable practice of revealing a “tipping point” is just that: a fashion, and not science. One should follow the sage advise of Marxist political economist, Alfred Evenitsky: “...if one is a Marxist intent on understanding the underlying forces which move and shape the capitalist economy, the ‘trigger,’ while not insignificant, is of less importance than the underlying economic configuration which is being ‘triggered.’ This is a difference in emphasis and point of view, but it is more than that. It is also a difference in the depth of analysis, for ‘triggers’ are in their nature surface phenomena and provide few clues to the subterranean forces they release.”

So what are the subterranean forces shaping the US economy (and the global economy) in mid-year 2015?

Comparisons with earlier downturns-- 1980, 1983, 1991, 2002-- show that the post-2009 “recovery” is by far the most tepid and problematic. Significantly, each successive decline has delivered a successively weaker rebound, culminating in the tentative, stumbling growth after 2009.

Clearly, the enormous boost that global capitalism (and especially US capitalism) received from a several-decades-long tonic of classical and state-monopoly policies (deregulation, privatization, the easy substitution of workers from cheap labor markets, and state intervention on behalf of the monopolies), along with the demise of the economic community of European socialism and the concurrent expansion of global markets, is reaching exhaustion. The historically unprecedented oddity of roughly one-third of the world's population joining or re-joining the global market economy in little more than a decade provided a powerful thrust to a struggling capitalism mired in a toxic swamp of high inflation and slow growth. Neo-liberal ideology fit the moment well, bringing a seductive world view to potential elites throughout the formerly socialist world and to other countries with a tempered stance towards capitalism.

But that unique moment is passing and those who were convinced that “there is no alternative” are surely having second thoughts. The triumphant capitalism of several decades earlier now seems far less sure-footed.

From the perspective of working people, the post-2009 “recovery” is no recovery at all. Change in average hourly earnings is trending below its generally pathetic long-term performance over the last thirty-five years; non-farm payrolls, disposable personal income, and consumer spending growth largely trail previous expansions; and total household debt is marching steadily toward the previous high of the third quarter of 2008.

Both the harsh discipline of unemployment and the lack of effective representation (no mass political voice, frail class-based organizations) batter the US working class. The growth of employment since 2009 exists largely in the low-wage, temporary, and contingent sectors, exerting little pressure on employers to raise wages and benefits. Chastened by the financial crisis, workers have been hesitant to take on mortgage and credit card debt. But this cautious posture has been more than offset by exploding student loan and automobile loan debt. Consequently, household debt has skyrocketed to levels unseen since 2007 (only 6.5% below its 2008 peak).

For those on the other side of the class divide, the post-2009 period has been most generous, thanks to high profits, low interest rates, exploding equity prices, improving home prices, and friendly government policies. The Dow Jones Industrial Average has recovered smartly from its February, 2009 low of around 7,000 to over 18,000 in May of this year-- an increase of well over 150%!

How can the stock market grow so explosively when Gross Domestic Product-- an, at best, exaggerated measure of real value generation-- grew by only 21% in constant dollars in the same period? What magic lies behind the good fortune befalling the ownership class?

The explanation of explosive stock market inflation begins with the enormous concentration of wealth in the hands of those buying and selling equities. The capitalist imperative to invest, to pursue a return, drives money back into a market filled with “bargains.” And “free” money, available through virtually interest-free loans, amplifies the surge in stock purchases. Publicly traded firms, flush with cash and able to fund investments with “free” money, buy back caches of their own stocks, inflating the price of stocks remaining in the market. Firms also pump up their dividends with their bloated cash reserves. And most significantly, the Federal Reserve's policy of quantitative easing-- gobbling up financial instruments and depressing the yield on bonds (and driving up their prices!)-- effectively herds investors seeking attractive returns into equity markets.

That equity prices have departed dramatically from economic reality is easily shown. Traditionally, investors grow suspect of equity prices when they exceed historical relationships of price-to-earnings (the p/e ratio). The p/e of the Standard and Poor's 500 has reached 17.5, well above its 10-year average of 15.8 and sufficient to strike alarm bells.

For comparative purposes, another gauge of the sustainability of equity pricing is the so-called Buffet indicator, the ratio of the Federal Reserve's estimate of corporate capitalization over the concurrent gross domestic product. In 2015, the ratio topped 1.32 (corporate capitalization 132+% of GDP). Immediately before the 2008 crash, the ratio was approaching 1.15. Before the 2000 “dot com bubble” burst, the ratio was 1.53, a level easily within reach in the next year or two given the current trend. Clearly, equity inflation has taken the stock market into a danger zone associated with the last two downturns.

Do the apparent dangers signal economic speed bumps or serious systemic issues?

Policy makers-- limited by ideology and class loyalty-- sought to escape the jaws of the 2008 crisis by pumping up the prospects of corporations and the ownership class. The corporate bail-outs (too often conditional upon downsizing and layoffs), the near-zero interest-rate policies, and a host of other corporate-friendly moves paved the way for the consequent surge in profits and the stock market frenzy.

These policy makers were counting on corporate coddling and painless credit to encourage firms to invest vigorously. They were determined to create a climate with investors and corporations choking on cash, with ready access to interest-free loans, and anxious to make even more money through hiring and expansion.

Indeed, with massive layoffs, labor productivity jumped as production continued and the hours worked declined (raising the rate of exploitation), fixed business investment grew at a satisfactory rate, and profits exploded (S&P 500 companies' earnings soared 30% in 2010).

But this jump-start was not sustained. Federal Reserve policies (low interest-rate policies and quantitative easing) encouraged corporations to satisfy stockholders through mergers and acquisitions, stock buy-backs, and dividends rather than invest in plants or hiring. Consequently, corporations successfully decoupled market capitalization from earnings performance. Since 2011, corporate capital returns (to investors) have exceeded capital expenditures. As profit growth declined since the 2010 explosion, stock values nonetheless continued to climb, leaving investors overjoyed.

Broadly speaking, the three key factors of fixed business investment, productivity and, corporate profits have been trending downward for three to four years. First-quarter 2015 fixed investments fell 3.4%, not surprisingly, output per hour (productivity) fell by 3.1%, and earnings were expected to barely move. These three interdependent and fundamental indicators underscore the critical weaknesses in the US economy. Capitalism has wrung as much sweat as it can from workers, managers are reluctant to invest in new or advanced means of production, and US corporations are experiencing a decline in the rate of profit.

Are the problems besetting the US economy and confounding bourgeois economists fleeting or deeply embedded in the 21^st century capitalist system?

A recent Wall Street Journal (World Awash in Almost Everything, 4-25/26-15) makes some interesting, relevant observations. Authors Josh Zumbrun and Carolyn Cui note: “The current state of plenty is confounding on many fronts... Global wealth-- estimated by Credit Suisse at around $263 trillion, more than double the $117 trillion in 2000-- represents a vast supply of savings and capital, helping to hold down interest rates, undermining the power of monetary policy.”

They might add that this extreme accumulation of capital also overflows existing channels of profitable investment, exerting downward pressure on profit growth and encouraging ever riskier investment choices. Capital will not remain idle. In an environment of over-abundance, conventional profit opportunities become scarcer and investors reach desperately for yield.

As with pigs foraging for truffles, too many foraging pigs reduce the chances of any individual pig finding the treasured fungus. Profit-seekers -- like truffle-seekers -- will go to any length and take any risk to secure their goal. Today, there are 65 venture capital investments of over $1 billion each (CB Insights says there are 107), drawing funds from yield-hungry retirement funds, mutual funds, and hedge funds. Whatever the number, all agree that the total capitalization of these investments in firms that are little more than start-ups approaches or exceeds the capitalization of the similar “dot com” firms that blew up in 2000. Like the “dot com” fiasco, capital is flowing freely to almost any garage enterprise with little more than a rough business plan and a clever idea. The search for yield is that intense.

As New York Times writer Conor Dougherty (Tech Investors See the Froth, but None Dare Call It a Bubble, 4-25-15) comments:

But the tech industry's venture capitalists - the financiers who bet on companies when they are little more than an idea - are going out of their way to avoid the one word that could describe what is happening around them.

Bubble.

Once again, the US economy suffers from a case of hyper-accumulation coupled with a declining rate of profit, seducing investors into riskier and riskier bets. As with the lead-up to the 2000 downturn and the 2007 crash, too much capital is pursuing too few attractive investment opportunities. Consequently, rampant speculation follows, risk intensifies, and the profit-making engine runs off the rails.

From time to time, we all need to be reminded that the capitalist system runs on profit and the confidence that profit-making opportunities will be available tomorrow. Even Marxists need to be reminded that Karl Marx placed the process of accumulation and its tendencies at the center of his analysis. Careful study shows that the challenges to continued profit growth have not been wrung from the US economy. As investors have emigrated from traditional productive sectors or service areas of the economy in search of further investment opportunities, they have shaken the system's foundations with risk and insecurity. But given the dynamics of 21^st century capitalism, given the enormous concentration of wealth that relentlessly and necessarily seeks to grow ever larger, investors must accept more risk and insecurity. There is no alternative, to steal a quote from the enemy. Therefore, they must continuously put the capitalist system in harm’s way.

For those who-- like the popular social democratic thinker, Thomas Piketty-- think that we can redistribute the obscene concentration of global wealth through tax policies and set capitalism merrily on its way... think again. Should, by some miracle, the ownership class surrender their grip on the state, capitalism would, in time, reproduce the inequalities that lead to the concentration of capital and crises. That's its nature. As the great song writer Oscar Brown Jr. reminds us:

“Take me in, tender woman," sighed the snake

"Now I saved you," cried the woman

And you've bit me, even why?

And you know your bite is poisonous and now I'm going to die"

"Ah shut up, silly woman," said that reptile with a grin

“Now you knew darn well I was a snake before you brought me in...”

Zoltan Zigedy

zoltanzigedy@gmail.com