Will the U.S. recession endure?

By S. Swaminathan

Apprehensions of a brooding global economic recession originating in the slowdown of the U.S. economy, have been the talking points in international fora for months now.

The macabre terrorist onslaught on New York and Washington of September 11 and the probabilities of military conflicts erupting in its wake, have only heightened world-wide concerns about the damaging ramifications of the U.S. slowdown.

A week before the terrorist strikes against America, it was known that industrial output in the U.S. had shown a decline for eleven successive months till August. The reckoning was that the GDP growth in the U.S. during 2001 would be only 1.6 per cent as against 5 per cent in 2000 and 4.2 per cent in 1999. Clearly, in terms of the average annual growth rate of 3.4 per cent recorded during the period, 1990-99, the U.S. economy, was entering a phase of constriction.

The unemployment rate had grown to 4.9 per cent in August, up from 4.1 per cent a year earlier. By the criterion of a GDP growth rate of a minimum of 2.5 per cent, the recession in the U.S. economy had passed the zone of conjecture, much before September 11.

The central issue in the debate in the U.S. on the sliding fortunes of the economy was not whether the recession was a reality or a mere contingency, the question was about whether the recession would be a prolonged period of economic and social distress (the so-called U-type) or one which could reverse itself sharply during the short-term (the so-called V-type).

The drift of expert opinion during the pre-September 11 period, seemed to be markedly inclined towards the optimistic expectation that the U.S. recession would only be a passing phase.

It is another matter that speculation in the more recent period is focussing on how a well-coordinated international campaign against terrorism spearheaded by the U.S., with its awesome military arsenal, can make for global economic uncertainties a scale and magnitude which have not been experienced since World War II. All this apart, the projections made by the IMF in its World Economic Outlook-October 2001 - which have obviously not factored in the post-September 11 scenario - appear quite sanguine.

While the IMF forecasts the GDP growth rate for the developed countries to rise from 1.3 per cent in 2001 to 2.1 per cent in 2002, its projections for GDP growth in the developing countries - 5.3 per cent in 2002 as against 4.3 per cent in 2001, appear even more comforting.

As the IMF looks at it, China will continue to post a 7 per cent plus growth in 2002 while in the case of India, a projected growth rate of 5.7 per cent for 2002 as against 4.5 per cent for 2001, does indeed appear to dispel gloomy premonitions.

Where does all this point to? That a hurricane-like disruption of the global economy is most unlikely even granting that the developed countries - the U.S., Europe and Japan - are currently caught in a ``synchronised slowdown''.

Fragility is not the U.S. economy

For years, the U.S. has been the global economic giant - the prime-mover of the world's manufacturing, trading and financial systems. With a GDP of $835 billions in 1999, the U.S. accounted for 22 per cent of global output of goods and services. Its exports in 1998 were of the order of $ 934 billions and imports, of $1098 billions.

What is perhaps, not well-known is that foreign direct investments in the U.S. economy, are of astronomical proportions. In 1998 alone, they were of the order of $193 billions!

Even more than its massive size, the U.S. economy is unique in that it is driven by the services sector, which accounts for 72 per cent of its GDP while industry represents 26 per cent and agriculture a mere 2 per cent. High productivity levels, technological innovations constantly challenging the key players in the competitive process and enormous resources being pumped into the R & D sectors - these are the factors which make for a high degree of resiliency of the U.S. economy towards the winds of change.

The U.S. is the celebrated exponent of a high mass consumption society - the term which is generally attributed to W.W. Rostow, the author of ``Stages of Growth''. In 1999, consumption expenditure represented 83 per cent of the U.S. GDP (of which private consumption expenditure was as much as 68 per cent) while gross domestic savings were 17 per cent of the GDP. This is the strength and perhaps also the flaw of the economy.

The current malaise of excess capacity (especially in the new economy), and the decline in consumer spending largely bring out the vulnerable dimension of a consumerist society. But should the faltering of consumer spending aggravated by the psychological trauma triggered by the terrorist vandalism, necessarily become a self-perpetuating disequilibrium in the system?

Economic success

Michael Porter (``The Competitive Advantage of Nations), in bringing out the factors which put the U.S. right on top of the world's economic hierarchy after the World War II, draws attention to the following:

(1) The rich domestic endowment of national resources. (2) Consistently high levels of investment, R & D efforts, technology and its pervasive applications, improvement in the quality of human resources. (3) A large and affluent domestic market, standardised mass production, mass marketing, exports (especially of the American way of life). (4) Integrated industry clusters - cars in Detroit and computers in Silicon Valley, electronics and plastics (5) Management excellence, high morale of workers community respect for industry and business and (6) Active role of government as facilitator of industry and as regulator of competition. The point is that an economy built on such foundations has an inherent vitality to weather adversities of a domestic origin or of an extraneous nature. Indeed Porter talks of the World War II itself as a ''fluke factor`` which buoyed up the fortunes of the U.S. economy.

Moving towards a new policy paradigm?

Events during the last two weeks in the U.S., following the outrage in New York and Washington, have been very much more than a matter of the Government and civil society steeling themselves to combat the savagery of terrorism.

Long before the September 11 visceral attacks on values of human civilisation, the U.S. policy regime and particularly, the Federal Reserve authorities, had demonstrated a clear preference for lowering interest rates as a response to declining spending in the economy and the process is almost certain to continue.

In the immediate aftermath of the attacks on September 11, the Bush administration came out with an unprecedented government spending package of $ 40 billions for relief and an equally revolutionary bail-out package for $ 15 billions for the airline industry - the worst affected by recession compounded by the post-hijack beefing-up of security systems in around 19000 airports in the U.S.

The Congress has had no qualms in approving the new bills which mark such an obvious deviation from the cherished paradigm of the minimalist state.

Indications are clear that Keynesianism is back in the centre- stage of U.S. economic policy-making. Government cash injections in the economy, cheap money policy, bail-out schemes for private corporate industry, tax cuts, are all the instruments of the strategy.

As Professor Paul Krugman has recently written (this was before September 11), the U.S. might be preaching fiscal austerity abroad but when it comes to home remedies, it is Keynesianism which is the preferred approach!

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