The US economy has recently slowed dramatically and the probability of another economic downturn increases with each new round of data. This is a sharp change from the economic situation at the end of last year — and represents a return to the very weak pace of expansion since the recovery began in the summer of 2009.
Economic growth in the US during the first three quarters of last year was not only slow, but it was also dominated by inventory accumulation rather than sales to consumers or other forms of final sales. The last quarter of last year brought a welcome change, with consumer spending rising at a 4 percent annual rate, enough to increase total real GDP by 3.1 percent from the third quarter to the fourth. The economy seemed to have escaped its dependence on inventory accumulation.
This favorable performance led private forecasters and government officials to predict continued strong growth for this year, with higher production, employment and incomes leading to further increases in consumer spending and a self-sustaining recovery. A one-year cut of the payroll tax rate by 2 percentage points was enacted in order to lock in this favorable outlook.
Unfortunately, the projected recovery in consumer spending did not occur. The rise in food and energy prices outpaced the gain in nominal wages, causing real average weekly earnings to decline in January, while the continued fall in home prices reduced wealth for the majority of households. As a result, real personal consumer expenditures rose at an annual rate of just about 1 percent in January, down from the previous quarter’s 4 percent increase.
That pattern of rising prices and declining real earnings repeated itself in February and March, with a sharp rise in the consumer price index causing real average weekly earnings to decline at an annual rate of more than 5 percent. Not surprisingly, survey measures of consumer sentiment fell sharply and consumer spending remained almost flat from month to month.
The fall in house prices pushed down sales of both new and existing homes. That, in turn, caused a dramatic decline in the volume of housing starts and housing construction. That decline is likely to continue, because nearly 30 percent of homes with mortgages are worth less than the value of the mortgage. This creates a strong incentive to default, because mortgages in the US are effectively non-recourse loans: The creditor may take the property if the borrower does not pay, but cannot take other assets or a portion of wage income. As a result, 10 percent of mortgages are now in default or foreclosure, creating an overhang of properties that will have to be sold at declining prices.
Businesses have responded negatively to the weakness of household demand, with indices maintained by the Institute of Supply Management falling for both manufacturing and service firms. Although large firms continue to have very substantial cash on their balance sheets, their cash flow from current operations fell in the first quarter. The most recent measure of orders for nondefense capital goods signaled a decline in business investment.
The pattern of weakness accelerated in April and May. The relatively rapid rise in payroll employment that occurred in the first four months of the year came to a halt in May, when only 54,000 new jobs were created, less than one-third of the average for employment growth in the first four months. As a result, the unemployment rate rose to 9.1 percent of the labor force.
The bond market and share prices have responded to all of this bad news in a predictable fashion. The interest rate on 10-year government bonds fell to 3 percent and the stock market declined for six weeks in a row, the longest bearish stretch since 2002, with a cumulative fall in share prices of more than 6 percent. Lower share prices will now have negative effects on consumer spending and business investment.
Monetary and fiscal policies cannot be expected to turn this situation around. The US Federal Reserve will maintain its policy of keeping the overnight interest rate at near zero, but, given a fear of asset-price bubbles, it will not reverse its decision to end its policy of buying Treasury bonds — so-called “quantitative easing” — at the end of last month.
Moreover, fiscal policy will actually be contractionary in the months ahead. The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from US$400 billion last year to only US$137 billion this year. And negotiations are under way to cut spending more and raise taxes in order to reduce further the fiscal deficits projected for this year and later years.
So the near-term outlook for the US economy is weak at best. Fundamental policy changes will probably have to wait until after the presidential and congressional elections in November next year.
Martin Feldstein, a professor of economics at Harvard, is a former chairman of the US Council of Economic Advisers and is former president of the US National Bureau for Economic Research.
COPYRIGHT: PROJECT SYNDICATE
Two sets of economic data released last week by the Directorate-General of Budget, Accounting and Statistics (DGBAS) have drawn mixed reactions from the public: One on the nation’s economic performance in the first quarter of the year and the other on Taiwan’s household wealth distribution in 2021. GDP growth for the first quarter was faster than expected, at 6.51 percent year-on-year, an acceleration from the previous quarter’s 4.93 percent and higher than the agency’s February estimate of 5.92 percent. It was also the highest growth since the second quarter of 2021, when the economy expanded 8.07 percent, DGBAS data showed. The growth
In the intricate ballet of geopolitics, names signify more than mere identification: They embody history, culture and sovereignty. The recent decision by China to refer to Arunachal Pradesh as “Tsang Nan” or South Tibet, and to rename Tibet as “Xizang,” is a strategic move that extends beyond cartography into the realm of diplomatic signaling. This op-ed explores the implications of these actions and India’s potential response. Names are potent symbols in international relations, encapsulating the essence of a nation’s stance on territorial disputes. China’s choice to rename regions within Indian territory is not merely a linguistic exercise, but a symbolic assertion
More than seven months into the armed conflict in Gaza, the International Court of Justice ordered Israel to take “immediate and effective measures” to protect Palestinians in Gaza from the risk of genocide following a case brought by South Africa regarding Israel’s breaches of the 1948 Genocide Convention. The international community, including Amnesty International, called for an immediate ceasefire by all parties to prevent further loss of civilian lives and to ensure access to life-saving aid. Several protests have been organized around the world, including at the University of California Los Angeles (UCLA) and many other universities in the US.
In the 2022 book Danger Zone: The Coming Conflict with China, academics Hal Brands and Michael Beckley warned, against conventional wisdom, that it was not a rising China that the US and its allies had to fear, but a declining China. This is because “peaking powers” — nations at the peak of their relative power and staring over the precipice of decline — are particularly dangerous, as they might believe they only have a narrow window of opportunity to grab what they can before decline sets in, they said. The tailwinds that propelled China’s spectacular economic rise over the past