Business

Saturday November 7, 2009

Q4 test for US economy

By CECILIA KOK


THERE is no sugarcoating, no boasting, by US President Barack Obama when it comes to addressing the true state of his country’s economic recovery.

He said over the week that “positive news today does not mean there won’t be difficult days ahead”, pointing to the country’s high and rising unemployment rate as a troubling sign for the economy and heartbreaking moments for people who were losing their jobs.

The US unemployment rate reached a 26-year high of 9.8% in September. October figure has yet to be released at press time but as it is, most economists project the rate would probably exceed 10%, despite the improving outlook for the US economy.

Last week, the United States reported that its gross domestic product (GDP) rose at a pace faster than expected at 3.5% quarter-on-quarter (-2.3% year-on-year) for the three months to September 2009. That was the first expansion for the country’s economy in more than a year.

But to most economists, that was just an “artificial boost”, thanks mainly to the federal government’s US$3bil cash-for-clunkers programme that lasted from July to August. The programme, which was meant to resuscitate the country’s struggling auto industry, provided rebates of up to US$4,500 for car owners to trade in their old vehicles for new ones. The plan was a success as it managed to spur private consumption, with consumers increasing their spending on motor vehicles, during third quarter of the year.

But with the expiration of the cash-for-clunkers programme, herein lies the real test of the strength of the US economic recovery, and its fourth-quarter numbers will tell.

Try as we might to rely on other data such as improving factory orders and home sales as well as expanding manufacturing output as indications that the world’s largest economy could sustain its recovery, the less-bullish economists will continue to remind us about the high unemployment rates, slumping consumer spending and household deleveraging trend.

Former World Bank chief economist and Nobel Prize winner Joseph E Stiglitz, for one, believes that the US recession is nowhere near an end, “as the country’s job market is still in a very bad shape”. He is sceptical of the recent US economic recovery being able to sustain into next year.

Echoing the same sentiment is another Nobel Prize-winning economist, Paul Krugman, who believes that it would take a decade for the US economy to return to full employment. A weak labour market means consumer spending, which used to contribute 70% of the country’s GDP before last year’s economic meltdown, can no longer be the saving grace for the economy.

Certainly, private investments are still sluggish and hiring remains subdued, but here’s how Obama puts it: “We all know that in every economic recovery, there is going to be a lag between the economy growing again, businesses investing again, and businesses hiring again.”

No doubt, the healing of the labour market is crucial to sustaining the country’s economic recovery, but the third-quarter GDP growth itself is a good sign, as an expanding economy is the first step to job creation, says Obama.

So, maybe it’s really time for us to wake up and smell the coffee.

“Things are not that gloomy anymore, as there are so many positive indicators propping up,” says Affin Investment Bank economist Alan Tan.

Sharing his view with StarBizWeek, he says the recovery of the US economy remains intact.

In his latest weekly report on the US economic outlook, Tan wrote, “the fiscal spending, together with easy monetary policy in place, will continue to support the US economic activities going forward”.

Tan echoes the same sentiment as some bullish economists, who see the sustainability of the US economic recovery as driven by the three main factors.

One is the continuous public spending under the US government’s US$787bil stimulus package, which is part of the American Recovery and Reinvestment Act approved early this year. As of the end of the third quarter, only 26.3% of the monies had been spent.

Second factor is the US Federal Reserve’s commitment to maintain an accommodative monetary policy with interest rates kept at historical low levels for an extended period, which makes it easy to drive and stimulate the country’s economic activities.

Third factor is a healthy external environment for the US economy. With a weakening dollar, the country’s exports could probably get a lift.

(Exports currently represent just around 10% of the country’s GDP, and the country has been posting increasingly larger net-export deficits over the past 20 years.)

Economists concede that the United States is unlikely going to return to a strong growth path, as in the boom period, whereby the average GDP growth rate was between 4% and 5%. They say it is only reasonable to expect the country’s economic to grow at a slow and gradual rate of less than 3% going forward.

To them, that’s “economic sustainability” under what they would term as the “new normal” for the US economy.

And the cold reality is that, under the “new normal”, unless the US consumer spending grows again, the country’s improving GDP numbers could provide little meaning to the generally export-dependent Asian economies. The US consumer market after all is the largest market in the world for most of Asian goods.

Over the week, the US Commerce Department reported a decline of 0.5% month-on-month (m-o-m) in consumer spending for September, following a revised 1.4% m-o-m increase in the preceding month. The drop in consumer spending in September was the biggest since last December.

In addition, the US consumer confidence in October, as measured by Reuters/University of Michigan, showed a decline from 73.5 in September to 70.6. (The index in September was the highest in more than a year.)

Some US economists believe that the country’s consumer spending could grow again, but at a more subdued pace due to the rising unemployment that could result in lower income, reduced wealth and credit tightening for local households.

But Obama is currently looking at boosting exports as key to creating employment opportunities and driving the country’s economic growth. That’s a reverse of the strategies that most Asian economies are looking to adopt, and it looks like global rebalancing is already evolving, naturally.

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