Puzzling facets of US economy's decade-long growth

Nironjan Roy | Published: July 15, 2019 21:02:31 | Updated: July 19, 2019 20:48:41

This June US economy has marked its decade-long growth which started in June 2009 soon after the financial meltdown when the country had experienced severe financial crisis. In order to overcome that crisis, US government had to undertake massive regulatory measures and billions dollars bailout package which eventually helped reverse the country's economic trend resulting in the first GDP (gross domestic product) growth in June 2009. Thereafter, the economy has been persistently growing. It is said that if US economy continues to grow in the current month of July, it will exceed the previous record of continuous growth from 1991 to 2001.

In economic analysis, the words boom, stagnation and recession are very common which sometimes appear in a cyclic order. Since the great depression after First World War, the US economy along with other economies of the developed world had been experiencing this economic cycle after every eight to ten years. After continuous growth from 1991 to 2001, the dotcom bubble burst resulted in the recession in US economy, and after overcoming it, the economy turned to growth and continued till 2008 when it fell into another recession.

UNIQUE FEATURE OF THIS DECADE-LONG GROWTH: The position of US economy in the world is so dominant that whatever happens in the US is followed in other parts of the developed world. This trend has been experienced in all the previous growth, stagnation and recessionary periods. However, this time US economy's decade-long growth has caused a kind of exception.

Since June 2009, US economy has been growing alone while other parts of developed world have been struggling. Growth rates of many European countries are not at the expected level. Although they are not in a recessionary period, they have been struggling to fully recover and set their economy in a growth stage. Besides, the chaotic Brexit has added extra burden on them. Similarly, Japan has been struggling for the last ten years to pull its economy from stagnating situation and with a view to bringing back the economy, the central bank of Japan has been maintaining negative benchmark interest rate for the last ten years, though without any fruitful result. Only exceptions are the emerging economies where most countries including Bangladesh, China and India have been able to maintain their growth.   

GROWTH PARAMETERS: Calculation of economic growth, such as the like of massive economic size of the USA, is very complex. However, GDP growth over the previous period, rising of retail sales, low unemployment rate, rising inflation, rising yield on long-term Treasury Bill over short-term Treasury bill are considered strong indicators of economic growth. US unemployment rate dropped to 3.6 per cent in May 2019 -- the lowest in the past half century. Stock market price is also considered one of the strongest indicators of economic growth and during the last ten years, US stock price has considerably risen except some sudden shakes, falls and corrections in the bourses.

ADVANTAGE OF STRONG US DOLLAR: US economy enjoys unilateral advantage of its strong currency because of its uncompetitive position in world trade and commerce. No other currency can beat US Dollar, so this currency has been enjoying the status of hard currency during the last one decade. The value of Euro remained weak during this period, the Great Britain Pound almost lost its international popularity, and Japan's Yen also remained a weak currency. On the other hand, US Dollar being the strongest currency has turned into a widely accepted mode of international trade as more than 90 per cent world trade is now denominated in US dollar. This advantage of US Dollar has immensely contributed to the economic growth. Besides, strong demand for Treasury bill and vibrant bond market are also the result of the rising value of US dollar.       

INTRIGUING ISSUES: In general, if unemployment rate is low, average salary must rise due to scarcity of labour. This is not happening in the US. During the period of lowest unemployment rate, the government is not required to raise minimum salary because strong demand for labour will automatically increase the salary which will eventually result in the rise of inflation. This has not occurred during the decade-long growth period in the USA as Fed (Federal Reserve Bank, America's central bank) could not achieve its inflation target of 2.0 per cent in spite of taking all-out measures. It is true, this low unemployment rate has made it difficult for workers to find jobs easily but white colour jobs are still in acute scarcity.  Average hourly salary rise @ 3.2 per cent has been experienced in the current year but this may not be the result of low unemployment, rather it may be the impact of yearly salary increase due to inflationary adjustment and regulatory increase of minimum hourly rate. Besides, increase of minimum salary has caused adverse impact on many employees' gross take-home salary because hourly rate applies to those employees who are paid hourly, which means no work, no pay. Many employers have reduced work hour allocation per employee in order to compensate for the increased hourly rate rise. As a result, many employees' total weekly hour of work has eventually reduced adversely impacting their take-home salary.

In the US, per capita household debt, which is categorised as total personal borrowing other than mortgage loan, is very high and rising day by day. Total household debt of Americans has reached a record high of USD 13.29 trillion which was USD 454 billion over the previous year. This implies that more borrowings and more spending are contributing to the country's economic growth. But the question remains -- how this huge debt will be paid off. Similarly, student loan is also alarmingly rising and at present total student debt is USD 1.41 trillion which is USD 61 billion higher than last year's.

DECADE-LONG GROWTH AND LOW INTEREST RATE: Credit growth is not commensurate with American economy's decade-long growth. Interest on commercial loan remains at historic low and even benchmark rate set by Fed is also low compared to the previous growth period, i.e. from 2003 to 2007 period.  So far, Fed has raised its benchmark rate by 200 bps (Basis Points) only and was expected to raise further but paused. Under this situation money is not only cheap but also available, so manufacturer and service providers are supposed to go for expansion utilising cheap money. But this has not happened, rather this sector experienced adverse impact as reflected in Manufacturing Index (Manufacturing Purchasing Managers' Index), which has fallen in May 2019 and is the lowest since 2009. Similarly, banks and financial institutions are not comfortable and confident in lending. They have tightened their appraisal methodology of the borrowers and introduced stringent stress test in selecting borrowers. This has become a great barrier in borrowing from banks and financial institutions.

NO BUBBLE BUT FAANG: It is said that compared to other two previous growth periods i.e., from 1991 to 2001 and 2003 to 2007, this decade-long (2009 to 2019) growth has one strong point -- there is no bubble in this economic growth. Recession in 2001 was caused by dotcom bubble burst while economic recession in 2007 was caused by subprime mortgage burst. There is no such bubble or artificially inflated economic content that may cause similar type of recession.

However, currently US economy is substantially dominated by FAANG which stands for Facebook, Apple, Amazon, Netfex and Google. All of these are technology-based companies and their performance is highly volatile. Moreover, stock of FAANG is held by common people all over the USA and even outside of USA. So, crash or a drastic fall of any of these companies may cause widespread impact among Americans and its stock market. During Facebook scandal involving Cambridge Analytica over US Presidential election, the price of Facebook shares drastically fell and resultantly, the whole US stock market experienced a severe plunge. In 2007, debacle of one or two big financial institutions was good enough to result in worldwide recession.

The undeniable fact is that US economy has been growing while other parts of the developed world have been struggling, which seems to be unusual and inconsistent with previous trends. How far this isolated growth will continue remains to be seen in the future.   

Nironjan Roy, CPA, CMA is a banker based in Toronto, Canada.


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