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Anthony Rowley

US must ground its economic policy in reality, sooner rather than later

• Government spending has played a big role in boosting the US’ consumption and jobs figures, but how long can this last?

The Fearless Girl statue stands in front of the New York Stock Exchange on J

For some two and a half years now the rest of the world has watched with a mixture of wonderment and envy as the US economy has gone on churning out more jobs, higher consumer spending and relatively strong growth, so much so that inflation became a problem.

Where did all this growth come from? Was it simply that the world’s largest economy is better managed than those elsewhere? The Biden administration, which has presided over this extended growth period, would certainly like us to believe so.

The truth is different and it is beginning to become clear now. It turns out that recent US growth has in large part been bought by the federal government financing of both personal consumption and public sector job creation. This has added to ballooning and increasingly risky US fiscal deficits.

This is not a narrative that the Biden administration will be anxious to have broadcast in the run-up to the presidential election in November. Neither will complacent financial markets – glutted as they are with liquidity – be happy to see the myth of a resilient US economy explode.

As that myth progressively unravels in the weeks and months ahead, the implications for the rest of the world will become increasingly and uncomfortably obvious. Swings in interest rates and currency values as well as capital flows and trade will particularly impact the open economies of Asia.

The International Monetary Fund’s (IMF) latest World Economic Outlook offers a taste of what is to come. Especially worrying is its observation that in the first quarter of this year in the US “after a sustained period of strong outperformance, a sharper-than-expected slowdown in growth reflected moderating consumption and a negative contribution from net trade”.

Shoppers enter a Neiman Marcus store in Garden City, New York, on July 5. Photo: Bloomberg

That is rather like saying that two engines on a four-engine jetliner have stopped delivering full power while a third is sputtering. US private consumption accounts for close to 70 per cent of nominal gross domestic product (GDP) and appears to be slowing, according to CEIC global economic data.

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The US has long been a nation where the consumer is king compared to other advanced economies, a major factor behind the country’s external trade deficits. But what seems to have changed is the extent to which consumption is financed, directly or indirectly, by governments.

As a USA Today report put it, “Economists have been scratching their heads over how Americans can continue to prop up the economy with their spending despite high interest rates, persistent inflation, dwindling savings and rising debt.” The answer might be quite simple – jobs. “Payroll growth has been stunningly strong this year. Most people who land new jobs have been opening their wallets, with many making big lifestyle changes that include buying a new house or car, according to a recent survey by ZipRecruiter, a leading job site.”
Where have all – or most of – these jobs been coming from? In May, the US economy added 218,000 jobs according to the Bureau of Labour Statistics, while economists had expected it to add only 190,000, according to a Dow Jones survey. Hiring had been led by healthcare, hospitality and government sectors. Private sector employers added just 152,000 jobs in May, according to payroll processor ADP.

A member of a construction crew works on an infrastructure project in Decatur, Georgia, on July 3, after private sector job growth reportedly in June. Photo: EPA-EFE

Some might applaud the boost in public sector hirings but it is happening at a time of increasing domestic and international concern over the absolute size and growth rate of public debt in the world’s largest economy.
The IMF’s economic counsellor and research director Pierre-Olivier Gourinchas said during a press conference that “it is concerning that the United States, while at full employment, maintains a fiscal stance that pushes its debt-to-GDP ratio steadily higher, increasingly relying on short-term funding with risks to both the domestic and global economy”.
He added: “With higher debt, slower growth and larger deficits, it would not take much for debt trajectories to become much less comfortable in many places, especially if markets send government bond spreads higher, with risks for financial stability.”
Overall, the latest World Economic Outlook does not make for reassuring reading. First quarter economic growth surprised on the upside in many countries including China, as well as some parts of Europe. However, the US and Japan were notable exceptions, surprising on the downside.

A customer uses a credit card to pay for a purchase in Seattle, Washington, on July 4. Photo: Bloomberg

Inflation is rearing its head yet again. The IMF reports notes that service price inflation is holding up progress on disinflation, which complicates efforts to normalise monetary policy. Upside risks to inflation have increased, “raising the prospect of higher-for-even-longer interest rates”. 

• This is happening against a backdrop of escalating trade tensions and increasing policy uncertainty.

What lessons are to be drawn from the IMF report? 

The principal one is that things are going to get rocky along the path to any soft landing for the global economy that financial markets in general and stock markets in particular claim is at hand.

A financially challenged, if not yet bankrupt, US administration is going to have to draw in its horns on fiscal spending. The consequent softening in US growth and credibility is likely to impact most currency values via interest rates and the US dollar.

All this is on top of the extreme turbulence being generated by the US presidential election, which can only increase between now and November. More commentators need to start telling it like it really is rather than telling markets what they want to hear. The truth will out in the end.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

Anthony Rowley

Opinion | US must ground its economic policy in reality, sooner rather than later 

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