Is the US economy on the rebound?

Jagath Savanadasa

The much feared recession if not the most devastating downturn of the U.S. and some other leading economies is reportedly showing signs of changing for the better.

It is astonishing to say the least that a reversal of the U.S. economic fortunes is at least faintly evident. Just consider the fact that a little less than three years ago there seemed no end to the woes faced by the U.S. not to mention the other countries, which were considered the strongest in terms of their economic Clout.

Before we examine the reality of the so-called rebound in U.S. and also look at the “green shoots”, signalling a recovery as claimed by the Secretary to the US Treasury, it may be opportune to look back on the crisis that virtually the whole world was plunged into beginning the second half of 2007. We could then view the current situation in its correct perspective.

As is known the crisis was triggered following the collapse of the giant Lehman Brothers and other leading banks due to their bad lending practices. Though the crisis was brewing for some time it was never imagined that it would lead to a financial disaster of that magnitude.

Interconnectivity and cross border financial transactions are a feature of the Western world, such interconnectivity also implies inter-dependability. It is this factor that lubricates other economic activity.

The US collapse in view of the above had an impact - in fact a disastrous impact on the banking system and financial stability of the world’s leading nations.

The rapidity, which with the train of misfortune struck the world, defied belief and so were its attendant effects. According to a U.N. study (by its Global Economic Monitoring Unit, Development Policy Analysis Division) it led to an evaporation of “tens of trillions of dollars.” It also took a heavy toll of human capital. Job losses were the biggest and the most damaging felt in the developed world in the course of the steep plunge.

By the fourth quarter of 2008 the U.S. economic growth had declined as much as 3.8 percent in regard to the G.N.P. This was attributed to the drop in consumption and fixed investment. Nett U.S. exports had virtually come to a grinding halt. Such exports contributed substantially to the GDP of the US.

Employment

In 2008 alone approximately 3 million people lost their jobs in the United States. The country had not experienced that scale of unemployment since 1945.

Housing

The slump in housing in the US which was the most serious recorded for decades resulted in a vast inventory of unsold new houses.

In point of fact housing (in addition to employment) to this day continues to show a highly adverse situation despite other economic indicators showing positively.

Contracting international trade and rising protectionism

During the period November 2007 to November 2008 international trade (globally) declined by a record 14 percent. A rise in protectionism especially by developing nations in order to forestall damage to domestic economies was evident. The protectionist measures took the form of export subsidies import restrictions or high tariff to non-tariff barriers. (NTBs).

Stimulus packages

At the height of the crisis the U.N. called for rescue and stimulus packages to salvage the economies of all developed nations. Unfortunately the slow response from such economies and the long periods over which they were spread out proved to be ineffective. The final result affected exports industry and employment causing widespread human misery in almost all major economies. The visual scenes of misery were unprecedented.

To cite an example the US had not seen the likes of unemployed huddled in street corners at times during punishing winters since the first recession in the 1930s and 40s. This was despite the Congress having implemented the American Recovery and Reinvestment Act, worth USS 819 billion. This was the largest economic package offered by the government of any nation.

East Asia- no escape

And what of the nations dependent to a high degree on exports to the US They too suffered severe set-backs. Among them there were the Asian Tigers - strong economies that had reached the status of developed nations. South Korea, Singapore, Hong Kong and Taiwan.

On the other hand the Republic of China whose phenomenal rise had amazed the world also witnessed a significant deceleration of GDP which in the first quarter of 2008 was 6.8 percent when compared to the 13 percent growth achieved for the same quarter in 2007.

The most serious setback to the Chinese economy just as much as other major economies, related to unemployment.

The unusual situation in China which was unique to the country, however related to the migrant workers from China’s rural districts who had come to the principal cities to secure employment following the economic boom. In the wake of the downturn some 20 million of such migrants were laid off. This gave rise to the spectre of a humanitarian crisis and also fears of social disturbances.

The Chinese Government too injected massive funds, second only to the US in terms of the quantum (US $ 586 billion) in order to stimulate the economy way back in the last quarter of 2008.

South Asia

South Asia was the one region that to a high degree escaped the cruelly punishing impact of the crisis that brought several other regions to its knees.

However South Asian nations were not completely unharmed. Several South Asian countries are not largely dependent on exports. On the other hand exports do not contribute in a big way to Gross Domestic Product in South Asia.

If you consider Sri Lanka for example the contribution of exports to the GDP is approximately 20 percent. But it is worthy of note that garments which are exported to the US, UK and Germany mainly accounted for 50 percent of our total exports. The melt down however did have some setbacks for both India and Pakistan.

Exports from Pakistan suffered and Pakistan’s economy during the second half of 2009 was on the edge of a precipice with a huge fiscal deficit. This was however not due to the world economic situation to a high degree but internal instability. Pakistan’s foreign currency standing showed an improvement following the US$ 6 billion economic package the IMF granted in 2008.

Indian exports too showed a decline in 2008 and during the first quarter of 2009. Similarly the industrial sector too was affected in the same period.

Prophets of doom

The global financial collapse understandably was viewed with deep concern by experts. At the height of the crisis none seem to foresee that there would be any sort of recovery in the near future.

In the US the prophets of doom whilst castigating the corporate leadership and the government were ignorant of the basics of U S life namely its will to rally round and pull itself together.

Glimpses of recovery

How did the worlds leading economy initiate its recovery? Were there any special attributes that made the US stage what is now perceived widely as a stunning come back? Was it Governmental action or was it a combination of elements of different sorts including resourcefulness, ingenuity and the capacity to face adversity squarely that pulled the US back from the brink of disaster.

Though the US administration pumped in more than US$ 800 billion in the so called stimulus effort and the corporate world made a series of drastic changes including closures, large-scale lay-offs hoping to forestall the crisis these alone did not save the day for the U.S.

In order to have an understanding of the overall US life and its special characteristics one needs to look back at 9/11 and its aftermath. Though the nation was plunged into sorrow it collective will was amazing. So was the manner in which the country united itself following that terrorist attack which killed some 3,000 of US citizens.

Apart from taking decisive action militarily, the merits or demerits of which are open to question the US as a nation showed an extraordinary will and a resilience which converted the totality of its psyche towards the trajectory of a mental recovery. That was in 2001.

Let’s look at some of the other more discernable developments less ambiguous than human traits which have contributed to a change of status of the U.S. economy to-day.

(a) The US economy is poised to increase its GDP by an unbelievable 500 billion dollars in 2010 leading to a total reversal of the deficit growth in 2007, 2008 and part of 2009. In terms of percentage the growth is slated at 3.69 percent in fiscal 2010 once again reversing the negative growth experienced between the latter half of 2008 and the first quarter of 2009.

(b) Yet another development of note is the creation of jobs. In March 2010 alone the U.S. has been able generate over 160,000 jobs including 20,000 in the manufacturing sector.

(c) A more definitive and also a cumulative indicator of the health of the economy- an economy in which corporate activity is overwhelmingly important is its current index of shares and stocks.

The Dow Jones during 2009 had shown a 70 percent industrial average which was a solid indicator of positive trends in the economy. Of course the Dow Jones showed a worrisome and sudden downward slide in early May 2010 but seemed to recover later.

(d) Then there are key features of the American private enterprise system which undoubtedly played a vital role in the journey leading to the recovery. They are innovation, productivity and efficiency. In productivity to cite the present status, US lead the world well ahead if its nearest rivals Japan and Germany.

In innovation too it is again easily the most innovative country. Despite severe constraints following the crisis there was no letting up on R & D supported by huge doses of endorsements that poured into research from numerous funds.

In this regard history again is a good indicator. One has to only look back at the great American discoveries that led to amazing transformation of life on this planet. Let us look at just one area in testimony of the above.

It was the sheer innovative genius of US that ushered the new Information Age and era of change. The IT Revolution ushered by US is considered equal to the Industrial Revolution of the 18th century.

The US computer manufacturing sector is once again leading a stupendous surge in inventions basically in what could rightly be called the second revolution in Computer and Information Technology. Major IT companies like Apple and Google are once again in the forefront with products like Ipod which are expected to transform human life.

One of the sectors of the US economy which was virtually a write off was the motor car industry. Its rapid decline was evident long before the financial meltdown. Many thought that in the face of relentless competition in addition to the recession it will never revive.

But following cash infusions, restructuring and in some instances ownership transfers there is a silver lining emerging in the motor car manufacturing sector.

On the other hand the aero space industry which too was severely affected by the meltdown causing a serious downward trend in the sales of Aircraft too is showing signs of recovery.

Boeing the American giant in this field has reportedly sold some 400 aircraft in 2009 up from 375 in 2008, to buyers outside the US.

Despite such promising changes in the US economy it is too early to say whether the resurgence could sustain itself for a reasonably long time. But it is certainly a picture of hope for the world’s largest economy.

Will it be possible to resuscitate this fallen giant and restore its status as the world’s pre-eminent economy in the foreseeable future? Earlier even the most optimistic did not foresee a GDP growth in excess of 3 percent and a growth in employment. It is pertinent to conclude this study with a special reference to Sri Lanka-US trade.

The US is Sri Lanka’s biggest export market for garments and accounted for 50 percent of its exports in 2007, the year in which the crisis set in. In respect of other areas such as technological ties, education, cultural and social. Sri Lanka maintains an extensive relationship with the US. If US economy recovers, we will stand to gain.

(The writer is currently Secretary General of the Business Chamber of Commerce. He was earlier Senior Consultant Economic Affairs of the Federation of Chambers of Commerce and Industry of Sri Lanka and Secretary General of the National Chamber of Commerce of Sri Lanka.)