The U.S. economy "surged" in the first quarter, a news report tells us Friday morning, "roaring out of the 2001 recession with surprising strength." The news was triumphant. Was "recession" ever milder or shorter? And the U.S. stock market celebrated -- by falling again, to make it five down weeks out of six. What is going on?
There was a debate a year ago about the shape of the recovery the United States would enjoy. Would it be V, for victory and swift rebound? Would it be U, down for a while, then recovery? Would it be L, fall then slump? Would it be R, beloved of United Press International's Business Editor Martin Hutchinson, a swirling vortex, followed by a slide into a bottomless pit? Would it be W, down, then up, then another fall before eventual recovery?
It was for W that we went Feb. 9, 2001. Interest rate cuts and tax cuts would provoke a recovery that we expected "to fizzle out in 2002."
"That would be the end result of Bush's tax-cutting effort: not a U-shaped recession but a perhaps longer and worse one with Dubya written all over it," we concluded.
So where are we now, when the U.S. economy has just grown by a resounding 5.8 percent in the first quarter of 2002?
Fourteen months on from our thoughts on the course of the economy over the next few years the degree to which George "Dubya" Bush has influenced that upward mid-W swing is quite extraordinary -- and, to our mind, worrying. For all its high growth in the first quarter, the U.S. economy, far from looking healthier now, looks still more imbalanced and vulnerable to a downturn.
Bush believes in small government, doesn't he? You would not know it from the first quarter gross domestic product data released Friday by the U.S. Commerce Department. If you thought 5.8 percent GDP growth was fast, how about 12.4 percent? That was the increase in real federal spending, and it followed a rise of 11.4 percent in the fourth quarter.
Admittedly a "war" has more than a little to do with this: Bush's war on terrorism. But nonetheless the spending rise by the federal government is extraordinarily high. Nor is rising government spending confined to the federal level. State and local government spending rose by 5.6 percent following a rise of 9.6 percent in the fourth quarter.
The combined effect was that government spending contributed 1.4 percentage points of the 5.8 percent growth in the first quarter, having provided 1.76 points of the 1.7 percent GDP growth in the fourth quarter.
This cannot go on. The government cannot keep raising its spending while simultaneously stimulating private consumption by cutting taxes. The fiscal accounts are already heading substantially into deficit.
This, indeed, is one regard in which the U.S. economy has weakened in the past year. Under the former president, Bill Clinton, government had been running a surplus and cutting debt while the private sector borrowed its way to the mall. Now government has joined the private sector in running a deficit. Small wonder that the U.S. current account deficit was as high as 4.1 percent of GDP in 2001.
Government spending accounts, then, for 1.4 of those 5.8 percentage points of first quarter growth. The biggest contributor to growth was inventories -- restocking by firms -- which generated 3.1 percentage points of overall GDP growth.
Unlike with soaring government spending, there is nothing unhealthy about this. Finding that demand had weakened, firms had been cutting back inventories since late 2000. But there is again a question of sustainability. Firms will only restock if the sales are there. For that to happen, investment -- flat in the first quarter, having fallen dramatically all last year -- must revive, and consumer spending, the great motor of the great U.S. motor, must keep going.
As indeed it did in the first quarter. Personal consumption rose by 3.5 percent in the first quarter and contributed 2.5 points of the 5.8 percent rise in GDP -- an unusually small share, which might be taken as a good sign. But we come back to arguments we have made in many previous articles. It has taken tax cuts -- personal disposable income rose by 11.1 percent in the first quarter, largely because of them -- and a drop in the short-term interest rate to less than 2 percent to ensure that the U.S. consumer sticks to his first love: consuming.
That love is strong and faithful yet there is good reason to think it must be eroded. Unemployment claims are difficult to read now because of Congress's extension of the period for which claimants can claim but it is clear that the job market is still weak. The stock market is again heading down, making Americans feel less wealthy. The housing market -- which regular readers will know we see as supremely overvalued, shows some signs of stalling. The negative wealth effect, a phenomenon discussed a year or two ago, but which few economists now mention, must eventually play its card, we feel.
Meanwhile the government has played all its cards. Bush has cut taxes and raised spending and cannot cut taxes more because the fiscal position is deteriorating. Federal Reserve Chairman Alan Greenspan could cut rates more, but not by much. There is no longer any policy tool left to keep the consumer where he has long been: happily over-spending and indebting himself.
For this is the reality: The data has shown for years that Americans have been saving too little and spending too much. The balance must redress itself. It is then that we will get the "double dip," the renewed fall in the economy, the second down line of W.
Economists have been wrong, in our view, to call this slowdown over. We are only in mid-Dubya.
Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to [email protected].
