Risks are concealed in the shadows of US’ seemingly robust economic data

By Mei Xinyu Source:Global Times Published: 2019/5/15 21:54:58

Economic figures seem to signal that the US economy is prospering and outperforming other developed economies. US GDP grew at an annual rate of 3.2 percent in the first quarter. In April, total nonfarm payroll employment rose by 263,000 jobs, far surpassing Wall Street expectations.

Illustration: Luo Xuan/GT

In the face of these seemingly robust economic data, expectations among market participants and US officials for the economy are high, and many believe it can maintain long-term prosperity. However, considering US economic cycles, the "recovery plus growth" that has sustained for nearly 10 years is bound to be approaching a turning point. Further analysis of the booming US macroeconomy reveals major risks.

The exaggeration of economic growth is mainly reflected in the GDP, employment and stock market. In the first quarter, much of US economic growth came from an improved quarterly trade balance and inventory increase, which were caused by the front-loading of imports by companies due to concerns over the trade war. Since such front-loading of purchases concluded by the end of the first quarter, this economic growth is not sustainable.

In terms of employment, the US unemployment rate has dropped to its lowest level in nearly 50 years, but the figure has statistical problems. Many new jobs are short-term rather than full-time positions. More and more people of working age have withdrawn from the labor market, neither at work nor job hunting, resulting in a historically low labor force participation rate. Many have left the job market for re-education or training. Once they return in a few years, the labor market will face greater pressure.

As to the stock recovery, the US stock market has been generally on the rise since last year, thanks in large part to overseas earnings US companies brought back under the 2017 tax reform bill. Lacking investment opportunities in the real economy, these funds can only be invested in the stock market, especially in the form of repurchase of their companies' own stocks, thus driving up stock prices. While company executives and investors may be happy about the use of these funds, it is not conducive to long-term sustainable development of the US economy.

In the meantime, after years of quantitative easing, there have been a large number of "zombie companies" in the US market, which have no sustainable income and profit cash flow and have to rely on continuous financing. With the normalization of monetary policy, financing costs for zombie companies will rise, pointing to increasing bankruptcy pressure.

In a recent interview, US Vice President Mike Pence called on the Federal Reserve to lower interest rates. But such a request goes against normal economic logic. In the face of good economic data, normal operations should be to tighten monetary and fiscal policies to make room for maneuvering in the next round of crisis. But despite the robust economic figures, high-level US officials repeatedly called on the Fed to lower interest rates and even restart quantitative easing. It seems that, deep down, US politicians don't have much confidence in the US economy, and they hope to postpone a financial crisis until the end of the US presidential election next year through loose monetary policy.

Economic cycles are fundamental to the market economy. Since the industrial revolution in the 19th century, the US macro economy has never been able to rid itself of these cycles. Before World War II, the time between two crises was basically no longer than 10 years. Even after WWII, with advanced macroeconomic management, continuous economic expansion has rarely lasted for 120 months.

The US economic recovery that began in the third quarter of 2009 has continued for nearly 10 years. Amid the optimistic sentiment about robust economic growth, many market participants have invested everything in the US stock market. But the problem is that long-term prosperity must be based on revolutionary scientific and technological progress. In the 1990s, the new technological revolution represented by IT was groundbreaking and penetrated almost all sectors of the national economy. Is the US now engaged in any new groundbreaking technological revolution? I'm afraid not.

Furthermore, the US economy relied largely on unconventional monetary policy, such as quantitative easing, to recover from the subprime mortgage crisis, so its monetary policy is far from returning to normal. Fiscal deficits and debt burdens are unprecedentedly high. Once economic recession and financial crisis occur again, the US will have less room to maneuver compared with the previous crisis.

Do you really believe the US economy can maintain its current prosperity for long?

The author is a research fellow with the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce. The article was first published on yicai.com. bizopinion@globaltimes.com.cn


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