[Mb-civic] Soft patch or marshland? Economist

[Michael Butler]

Soft patch or marshland?

Jul 30th 2004 
>From The Economist Global Agenda


According to the latest figures, the American economy hit a soft patch in
the spring. Will it bounce back, or get bogged down?


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AMERICANS have fallen prey to a variety of economic anxieties in the past
year‹some real, some imagined. First, they fretted that growth was not
translating into jobs, then that growth might spill over into inflation. But
growth itself, sometimes at stupendous rates, has been more or less taken
for granted. After all, according to revised figures released on Friday July
30th, the American economy expanded by 4.5% in the first quarter of this
year, by a shade over 4% in the final quarter of 2003, and by 7.4% in the
quarter before that (all at annualised rates). Even the shallow recession of
2001 turns out not to have qualified as a recession at all, by the technical
definition of two consecutive quarters of negative growth.

Many economists expected growth to remain strong for the rest of this year,
if not beyond. But those assumptions now appear a little complacent. The
economy, Friday¹s figures reveal, slowed unexpectedly in the second quarter
of this year, growing by just 3%.

 Over the long run, as its labour force grows and becomes more productive,
the American economy can probably sustain a growth rate of roughly 3.5% a
year. If it grows faster than that for a few quarters, unemployment falls
and inflationary pressures build. But if it grows more slowly, unemployment
tends to rise. Thus, a growth rate of 3%, though quite respectable by the
standards of any other mature economy, will do nothing to alleviate
lingering anxieties in the American job market. Despite three months of
strong job creation between March and May, hiring ebbed in June and the
proportion of Americans participating in the labour market remains pretty
weak by historical standards. Much now hangs on the next monthly employment
report, due on August 6th.

One of the abiding motifs of America¹s recovery so far has been the
³indefatigable consumer². But the American consumer is now looking as tired
as the cliché. Household spending grew by just 1% in the second quarter;
expenditures on consumer durables fell by 2.5%. The Federal Reserve¹s recent
anecdotal report on the American economy, the so-called ³beige book², paints
a greying picture. The environs of Chicago are doing well, but New York,
Cleveland, Richmond, Kansas City and San Francisco showed evidence of a
slowdown, albeit modest. Cars are no longer flying off the sales lots, and
retail sales in general appear to have weakened.

It is becoming increasingly apparent that the gains from America¹s
productivity-led recovery have been unevenly distributed. Corporate profits
are strong, and business investment leapt by almost 9% in the spring. But
pay has lagged behind, and the wages of production workers have stagnated.
Of course, through its tax cuts, the White House has done its best to
provide what employers will not‹a substantial boost to take-home pay. But
the effects of those tax cuts are beginning to fade, just as prices at
American petrol pumps rise.

What consumers do not earn, or receive back from their government, they must
borrow. Household debts grew by more than 10% in the first quarter, and now
add up to more than 115% of disposable income. HSBC, a bank, says that the
recovery is built on ³marshlands of debt². With interest rates now rising,
this ready source of spending power may be about to dry up. Indeed, the
beige book reports that borrowing by homebuyers declined in San Francisco
and New York, two of the hottest property markets in the country.

 According to Alan Greenspan, the chairman of the Fed, the American economy
has trespassed on to a ³soft patch². All recoveries go through them from
time to time, he says, and this one should prove short-lived. He may well be
right. But if the soft patch turns out to be something a bit marshier, the
recovery¹s foundations may not be as secure as many had thought.




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