US economy shrank in winter but staging a spring rebound

31 May 2015 | Author: | No comments yet »

Economy is Weak, Stocks Are In A Bubble, And Washington Must Change Course.

The downturn in the US economy was due in part to a swelling trade deficit caused by a strong dollar and plunging investment in oil exploration following the drop in fuel prices. About 30 days after each calendar quarter the Bureau of Economic Analysis (BEA) releases its report on how the economy performed during the previous quarter.

Photo: AFP Gross domestic product shrank at a 0.7% annualized rate in the first quarter, revised from a previously reported 0.2% gain, according to commerce department figures issued on Friday in Washington. Now, if one accepts the current government’s 7.3 percent as true then one has to accept the previous government’s 6.9 too because methodology and numbers are neutral quantities. The average growth in the decade between 2004 and 2014 was close to eight percent – though former finance minister P Chidambaram would insist it was 8.5 percent. It could be argued that the gap between the potential of the economy and actual delivery is massive, but that’s a matter of subjective interpretation.

This is when China has decelerated from 10 percent plus in the last three decades to the sub eight territory in recent years and looks set for a prolonged low growth period, the US is still reviving at five percent and the rest of the world is performing poorly. Let’s take out the argument that China and the US are multi-trillion dollar economies and from their base a growth of five percent is much bigger than India’s eight percent; the same way you cannot compare Bihar’s growth with Gujarat’s. Last quarter’s contraction was smaller than the 2.1% fall at the start of 2014, when a prolonged patch of bitterly cold temperatures held back the economy.

What the numbers suggest is India has managed to maintain a steady growth momentum despite the blip over a couple of years due to global headwinds and policy chaos at home. The Narendra Modi government’s push to the manufacturing sector through the Make in India initiative and its emphasis on infrastructure as the vehicle of growth are likely to place the country in a trajectory where China used to be not long ago. Clearly, the extended run up in the stock market, which long-term requires a healthy economy for strong profits, is in the early to mid-stage of a bubble. The numbers may please rating agencies and investors but without percolation of the benefits of the growth process deep enough it guarantees no political return. Unless and until a new regime is installed in Washington, one which is more business friendly and less concerned with remaining in power, I fear the economy will continue to suffer.

A widening trade deficit subtracted 1.9 percentage points from growth, the most since 1985, compared with the previously estimated drag of 1.25 points, according to the commerce department’s data. The prime minister and Finance Minister Arun Jaitley have been facing flak from even their biggest supporters for being incrementalists in their approach rather than being bold.

Revisions to incomes showed wages and salaries rose even more than last reported and the saving rate was the highest since the end of 2012, indicating households can unleash some pent-up demand. Still, it marked the weakest reading in six months. “The index is still quite high,” Richard Curtin, director of the Michigan Survey of Consumers, said on a conference call after the figures were released.

Their cheerleaders would like the Modi-Jaitley duo to go for political confrontation to push through a radical economic agenda to pitchfork growth to a higher orbit. During the latter half of the month, “I expected confidence to inch upward and I still think that is likely over the months ahead.” The economy is poised to pick up this quarter. A Bloomberg survey of economists in May predicted growth will accelerate to a 2.7% pace in April through June, with household consumption expanding 3.2%. There is gradual realization that confrontation does not help, particularly when there are more areas of convergence than divergence in economic thinking among a large section of the political class.

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