The question that has been hounding every American since the collapse of Lehman Brothers – can the US tread upon the road to economic recovery? In the past half decade, the outlook among economists has been mostly negative – almost stagnant (or negative) growth, higher unemployment, low consumer demand and even lower industrial production. Perhaps the best evidence of this lack of trust has been the three QE (Quantitative Easing) packages that the US Fed has fed the markets with. Recently, there were rumors that the Fed may finally scale down the QE3.
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That the Fed finally did not is common knowledge, but this does not mean the gloom which once surrounded the US economy has remained constant. In the past year alone, changes have been taking place which, in part, led to the rumors of a QE3 rollback in the first place. To evaluate these changes, however, we need objective criteria against which to evaluate them. The criteria for economic recovery are:
- Household savings (including rates of household formation and changes in household debt).
- Consumer demand
- Production changes (quantitative and qualitative)
- Changes in the rate of unemployment
- Trade deficit (high trade deficit is indicative of an US economic rebound since US demand drives a sizeable percentage of world production. Higher demand leading to higher deficit in the short run tends to stabilize foreign markets, making it more receptive to US exports in the long run)
- Change in US GDP (as a result of cumulative effects of above points)
We will now have to analyze the changes in each of these indices and how they affect the US economy
- Household Savings – Considering that tough economic conditions lead to decrease in household formation and savings, the reverse should be excellent news for the economy. Following the collapse in 2008, growing unemployment rates forced many in the 18-30 age range to shift in with relatives/parents due to unemployment. This had a cumulative effect, leading to there being 2.3 million lesser households than what should have been there based upon population growth. Marriage rates fell from 7.7 to 6.7 per 1000 people between 2005 and 2011.
Latest reports however, show that household formation – due to marriages, people moving out of their parental homes and setting up their own, etc – has been rising. Along with it, the household savings have been rising, even as household debt, which was poised at a dangerous 130% earlier, has fallen to 100% of household earnings.
- Consumer Demand – The rise in household formation and household savings leads to rising demand for housing and household durables (like electronic goods, furnishings and upholstery) and services. Further, the sluggish economy had forced people not only to put off marriage and household formation, but buying of goods in general. As easy bank rates and growing household formation indicate a partial lifting of this gloom, the US consumer is expected to unleash his/her pent-up demand upon the market.
Signs of this were evident in a poll conducted in early May, which showed that buying attitudes towards durables like electronic appliances were at highest levels since 2007. Vehicle sales (it is estimated that each additional household leads to an additional sale of 1.3 cars) in the first quarter of this year rose to 15.3 million from 9.4 million in 2009, according to research firm UBS. According to government reports, sales in April beat estimates, in spite of prodigious cuts in federal spending, thus showing that people now have greater confidence in the US economic rebound.
- Changes in production – Growth, in demand, naturally spurs production, thereby aiding economic recovery. This has seen a 0.4% increase in production of automobiles, appliances and other consumer durables in August 2013. Vehicle assembly plants have been growing at their fastest pace in six years while furniture production is at its highest since 2009. Mining production, including oil drilling, rose 0.3%.
Further, Ford recently announced that it is quite confident of demand and is expanding output of its Fusion sedan. An additional shift at its Michigan-based plant will employ 1,400 new workers and will boost capacity by 30 percent. Finally, growing orders has led to rising backlog, which industry insiders consider as a good sign for the manufacturing industries.
- Changes in unemployment rates – Ideally, rising demand and production should lead to falling unemployment rates. It is true that the number of layoffs (measured indirectly through the number of new applications for jobs) fell. Further, the number of people seeking unemployment benefits has fallen by 7,000 to 308,000, the lowest since 2007.
However, analysts point out that this could be the result of having already maxed out their benefits, or having stopped seeking jobs. Indeed, they see the decline in unemployment from 7.4 to 7.3% in July to August as a result of this trend. This is especially true since the companies added a mere 155,000 new jobs a month since April as compared to 205,000 jobs a month in January – April.
- Trade deficit – Trade deficit, for reasons explained above, actually helps the US economy in the long run. Deficit has been growing in July, with a Bloomberg survey indicating that the gap would widen to $38.6 billion. Imports, including foreign auto parts, durables and petroleum products, have risen by 1.6 percent to $228.6 billion in July. In fact purchases of automobiles, engines and parts rose to $26.5 billion, the three leading automobile companies reporting higher than expected sales.
- GDP growth – Growth in the above indices should clearly reflect in GDP growth. In fact, US GDP in Q2 rose by 1.7% q/q annualized, higher than the 1.0% expected by markets, and higher than the 1.1% seen in Q1. This was primarily due to high resilience of consumer demand (as noted above) and less than expected cuts in government spending.
The above analysis shows that the US economy has been improving as measured by some vital parameters like household formation and savings, consumer demand, rising productivity and rising trade deficit. However, unemployment data provides a more complex picture, and it is quite normal for the Fed to be worried about it. On the whole, however, it can be said that though the growth may not be as fast (as seen in GDP data) as some would have hoped, the US economy is showing definite signs of a recovery, and it can be reasonably hoped that it will gain still higher growth rates in the near future.
Author: Aritra Mazumdar