The US economy: Hesitant and modest growth

Economic headlines present a confusing jumble of news. Commentators speak of avoiding a recession, while interest rates and food prices remain high. There are plenty of Help Wanted signs yet many people are not feeling particularly flush. What’s really going on? The purpose of this article is to examine the current US economic situation.

Where does the economy stand today?

Let’s begin by going through some key statistics.

Unemployment is at a very low 3.6%

Inflation has declined markedly. There are two main indices of inflation. The Consumer Price Index is at 3.0%, a decline of 6.1% from its high last June. Core inflation, which excludes food and energy, is at 4.8%.

The Gross Domestic Product stands at an annual growth rate of 1.8%. This shows growth, but an unspectacular growth.

Consumer spending rose by a very modest 0.2% in June, after rising 0.5% in May. While spending is not declining, it’s certainly nothing to write home about.

The Consumer Confidence Expectations Index rose to 79.3 in June, up from 71.5 in May.

Manufacturing is in the doldrums, again neither in free-fall nor surging. It decreased by an annual rate of 0.3% in June. However, it increased by 1.5 percent if you take the second quarter as a whole. The Institute for Supply Management survey, an important gauge of manufacturing, is at 46 percent, still under the crucial 50 percent mark. This indicates a contraction.

The situation is different in the service sector. Here the ISM survey figure was 53.9 percent in June, well over the half-way point.

The full round of second quarter profits figures are not out yet. The first quarter saw a decline of 5.9%, with $2.329 trillion being made in profits. Those second quarter profits that have been released show banks and airlines generally doing well. It will be important to see the effect that the Fed’s campaign to contract economic activity has on profits.

All three stock market indexes are up for the past year: the Dow by 10%, the S&P 500 by 15.3%, and the Nasdaq by 20.7%.

Spending on manufacturing construction has shot up to an annual rate of $194 billion.

What do the statistics mean?

To put these numbers in context, it’s necessary to understand the ruling class’s aim. They see high inflation as the number one danger facing the economy. Therefore, their priority is to bring it down to a 2 percent annual rate of increase. Setting high interest rates is their means to do this. The idea is that higher interest rates will make it harder for businesses to borrow money. This will mean less new projects. This, in turn, will lead to a contraction of economic activity. Then, with less money available for spending, companies will no longer be able to sell their products at high prices and therefore prices will come down. This is the thinking that has led the Federal Reserve to set its Federal Funds rate at 5.0 to 5.25 percent.

The ruling class wishes to see some decline in the economy, but obviously not too much. Fed President Jay Powell, therefore, has a very delicate operation to perform. This is what the media call the “soft landing”. In this situation, where the ruling class wishes it, some contraction of economic activity is inevitable. It’s highly possible that we may see a “technical” recession (where the leading indicators are slightly down for a six month period) or a “rolling” recession (where different sectors of the economy may be in decline at different moments in time, but there is not an overall secular downturn).

The first indications are that Jay Powell may have pulled his rabbit out of the hat. The US is not currently in a recession. Unemployment is low, inflation declining, the stock markets are rising, the service sector is on the upswing, and the GDP is growing even if not by much. It’s just not possible to describe this economy as being in crisis. It’s not booming, but the ruling class didn’t want it to boom. The best characterization for the economy today is hesitant and modest growth. This interpretation is the most effective way of encompassing today’s unusual combination of economic indicators: low unemployment, still high but declining inflation, mediocre wage increases, high interest rates, and increased government spending.

Five factors influencing the future course of the economy.

Having looked at the current situation, let’s look at some of the forces that may have an impact on the future.

1) Nature of the new jobs. Unemployment remains quite low. However, it’s important to look more closely at this. New job growth has been focused in the Health Care and Social Assistance, Professional and Business Services, Government, and Leisure and Hospitality sectors. Some of these sectors are in the lowest paying areas of the economy. There may be new jobs, but many of them are not stable and well paying. Working class living standards are not rising quickly. A rising tide is not lifting all boats.

There was recently a striking example of this. “Living paycheck to paycheck” is not a tightly defined economic term. However, people who describe themselves this way are clearly in real economic distress. An extraordinary 57 percent of Americans have identified themselves in this category.

The pundits love to talk about how high wages cause inflation. There’s really no truth to this. For most of the recent period, wage increases have been below the rate of inflation. If wage increases are now slightly above the rate of inflation, this is only because inflation has declined. It is not because of a great increase in wages. Significant increases, such as the airline pilots recently won, are far and few between.

The low income generated by many of the new jobs may well mean that consumer spending could be less than the low unemployment figures would suggest.

2) Debt. The debt to GDP ratio is 129 percent, meaning that the country owes considerably more than it makes. This creates an economic problem. It does not just involve paying back the creditors for their loan. Vast amounts of capital is pulled in to paying the interest on the loan, the “vig”. This is going to be a drag on the economy.

3) Inter-imperialist competition. The world situation is dominated by the rivalry between the US and China. The possibility is always there for new sanctions, tariffs, and supply disruptions. The war in the Ukraine is another factor that creates rivalry and instability. The unstable world situation is full of potential pitfalls for the US economy.

4) Trumpism. Trump and his supporters are a destabilizing factor for US capitalism. Capital needs a well-functioning superstructure to protect and further accumulation. Trumpism creates domestic turmoil and disorder, the opposite of what capital wants. It’s important for possible international investors to have confidence in the stability and strength of the United States. Events like January 6 have exactly the opposite effect.

It would have been a disaster for US capitalism if the Republicans had forced a government default during the budget ceiling crisis. There is certainly the possibility of future Trumpist disruptions to the economy.

5) Government spending. The large amount of government spending currently taking place is very positive for the economy. The Biden administration has implanted a number of significant stimulatory measures. First, there was the American Rescue Plan during Covid. This was followed by the Inflation Reduction Act, the Chips and Science Act and the Infrastructure Act. These policies set in motion huge amounts of capital. $280 billion was put into the economy by the Chips Act. The IRA allocated $391 billion for energy efficiency and green projects. The Infrastructure Act weighs in at a trillion dollars. As the late Everett Dirksen would have said, “A billion here, and a billion there, and pretty soon you’re talking real money”. These government programs will continue to be a source of strength for the economy.

Adding another factor

To conclude, we would have liked to add a sixth factor to this article: the impact of working class struggle on the economic situation. Unfortunately, the workers movement has been at such a low ebb that it has not been an element in the equation. Hopefully, by the time of the next economics article, the struggles of the actors, writers, and UPS Teamsters will have changed all that.