BY EVA CHENG
Whether the US economy is plunging into a recession is the $64 million question of the day. Preliminary data for the December quarter suggests that US gross domestic product was growing at an annual rate of only 1.4% at the end of 2000, after slowing from 8.3% in the 1999 fourth quarter to 4.8%, 5.6% and 2.2% in each of the subsequent quarters.
Fears that the US economy was not headed into a period of slower growth — what official economists call a "soft landing" — but into a recession only really began to grip the capitalist class at the beginning of this year.
The alarm bell was struck on January 3 when the Federal Reserve Board (the US central bank) decided at an emergency phone hook-up to lower the official interest rate by an extraordinary 0.5% (which doubled the usual scale). Then on January 25, Fed chairperson Alan Greenspan testified to the US Congress that the US economic growth at that moment was "probably very close to zero". Panic erupted six days later when the Fed repeated the 0.5% interest rate cut — a frequency in cutting credit rates not seen since the early 1980s, suggesting the official economic data yet to be released would reveal that the US economy was in much worse shape than Greenspan admitted on January 25.
A contracting US economy is nearly in sight, prompting further concern about how serious and long will the contraction will be. A recession in the US, given its great importance as a market to many countries, will almost surely drag the rest of the world into recession.
'New economy' hype
Only months ago the mainstream media was still saturated with hype about the US having created a "new economy", founded on "new (information) technology", which had forever overcome capitalism's traditional boom-bust cycle. That line of argument was quietly dropped after the "tech wreck" — the collapse of the stock prices of IT companies and "dot coms" from April last year.
In an attempt to retain the "new economy" framework in explaining the looming US recession, an article in the US BusinessWeek magazine (reprinted in the February 3-4 Australian Financial Review (AFR)), said, "It's a new economy slowdown in which the bad news has been coming thick and fast: plunging consumer confidence, sharply declining growth and a recession throughout much of the manufacturing sector".
BusinessWeek dutifully parroted Greenspan's official line of blaming the economic slowdown on a weakening of consumer "confidence": "If public faith in the economic future cracks, then the US is headed for a nasty recession followed by an extended period of little or no growth... Consumer optimism began to weaken in the third quarter of last year as the sagging stock market soured the spirits of wealthy Americans."
A recession could therefore be avoided, BusinessWeek argued, if consumers' "confidence" in the continuation of the ten-year-long boom could be reinvigorated: "By Greenspan's reckoning, the key is psychological-bolstering a delicate interplay between corporate and consumer confidence."
The London Economist toed a similar line, arguing in its February 3 edition that the "main private-sector spenders in the economy have moved from heady optimism to deepening pessimism".
The financial press's explanations are completely circular: the US economy is slowing down/entering a recession because of a weakening of consumer confidence in the continued rapid growth of the economy. Little is provided in the financial press to explain the material factors that drive business and consumer "optimism" or "pessimism".
Declining profits
"Optimism" or "pessimism" about the economy among the super-rich families that own the big corporations and banks that dominate economic life in the United States (and other capitalist countries) is fundamentally determined by their expectations about the future of corporate profits.
When prospects look bad for corporate profits, the super-rich owners do not simply adopt a "gloomy" mood. They decide to scale back their business investments.
That is what has been happening in the US since early 2000. US corporate outlays on equipment and software have plunged from a growth rate of 20.6% in the first quarter of the year to a growth rate of 5.5% in the third quarter. During the fourth quarter of 2000 corporate spending on equipment turned negative, contracting by 4.7%.
According to Aaron Patrick, writing in the February 7 AFR, US business analysts are predicting "flat" profits across the entire US economy — the first time since the 1991 recession — for the top 500 companies which comprise the Standard and Poor stock index.
The analysts got the clues from the top corporations' chief executives who warned them in recent official briefings that third quarter earnings, which will be released shortly, would be worse than previously forecast. The profit prospects for the "new economy" sector look particularly grim, with the entire sector now expected to deliver zero profits for the quarter.
So why were profits for the IT sector shrinking? How can it be otherwise if sales weren't going well? Computer sales, which a little while ago were widely suggested to be boundless, only grew by 2.5% in the fourth quarter, down from 76% in the first.
The decline in the sales of IT equipment and software was the result of the general cutback in corporate purchases of new equipment during 2000, as US corporations in the goods producing industries discovered that their investments in new equipment in the previous period had outstripped their capacity to profitably sell the increased volume of goods this new equipment enabled them to produce.
Overcapacity
Every period of capitalist economic growth inevitably ends in a crisis of overcapacity (overproduction), leading to cutbacks in corporate purchases of new equipment, reductions in output and employment. The current crisis has been gathering pace since the "Asian economic crisis" of 1997-98.
Two years ago, the London Economist was quite open about the problem. In its February 22, 1999 issue, the magazine said, "Thanks to enormous over-investment, especially in Asia, the world is awash with excess capacity in computer chips, steel, cars, textiles, and chemicals", adding that the excess capacity of all industries worldwide was coming close to its peak in the 1930s Great Depression.
The Bank of International Settlements, "the central bank of central banks", also added its concern in its 1998-99 annual report, noting: "The overhang of excess industrial capacity in many countries and sectors continues to be a serious threat to financial capacity. Without an orderly reduction or take up of this excessive capacity rates of return on capital will continue to disappear, with potentially debilitating and long-lasting effects on confidence and investment spending."
According to the US Economic Report of the President, 2001, capacity utilisation in US industry had risen from 79.3% during the 1990-91 recession to its 1990s peak of 83.5%, achieved in 1997. The same report noted that US business inventories (goods unsold) throughout the 1990s were still between 2.1 to 2.6 times that of final sales, compared to the averages of 3.24 for the 1970s and 2.95 in the 1980s.
The much-hailed benefits of labour productivity growth during the post-1992 upturn in the business cycle flowed disproportionately into a boost in corporate profitability, rather than rising incomes for US workers. Between 1992 and 1999 US labour productivity increased by 14%, but real compensation per hour for non-supervisory workers only climbed by 6.5%. Work hours, meanwhile, increased by 19.2% in the non-farm sectors of the economy.
Though workers' purchasing power had hardly improved, it became a more important driving force behind the 1990s expansion than in previous cycles. Household expenditures' contribution to the US gross domestic product rose from an average of 66% during the 10 years between 1985 and 1995 to 73% during the four years after 1995.
Workers weren't more confident to spend because they had more real wages in their pockets, but only because banks were more aggressively pushing loans at them. Having hovered around 7.5-10.9% of GDP between 1950-92, the personal savings rate plunged to 2.2% in 1999 and -0.1% in 2000. Household borrowing soared meanwhile, from 80% of personal disposable income during the second half of the 1980s to the all-time high of 97% in 1999.