US economy: a moribund giant

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In his last State of the Union address on 12 January 2016, President Obama claimed that ‘the United States of America, right now, has the strongest most durable economy in the world’; in its last report the US Federal Reserve Bank talked optimistically of ‘economic momentum’, ‘solid gains in household spending’ and ‘a strengthening economic recovery’. Yet a closer examination shows that this economic miracle is something entirely different. Steve Palmer reports.

US capitalism has had a difficult year. Despite all media talk of a ‘strong recovery’, there are critical indicators of stagnation. The inability to accumulate profitably was shown by the year-on-year decline, in the second and third quarters, of capital expenditure by the largest 500 non-financial corporations (the S&P 500 ex-fin). At the same time idle cash and short term investments amounted to $1.45 trillion, the second highest level in ten years. Capital expenditure has decreased almost 5% over the year.

Instead of investing, corporations have been spending their funds on three kinds of activities to try to compensate for their lack of profitability. The first is the buyback: buying up their own shares, reducing the total available so that earnings get measured against a lower share value, which makes a company look more profitable. They spent $566.1 billion on buybacks from October 2014 to September 2015. Second, over the same period, aggregate dividend payments to shareholders totalled $410.8 billion, the largest dividend amount for at least ten years. Finally, they have been acquiring and merging with other companies: in 2015, $5.03 trillion was spent on mergers and acquisitions, a record amount and the largest since the previous high of $4.6 trillion in 2007. To help pay for these activities, corporations have been borrowing feverishly: the total value of non-financial corporate bonds outstanding has risen by almost 35% since 2011 to $4.8 trillion.

At the same time that this supposed ‘recovery’ has been underway, the number of employees has been increasing and official unemployment has been falling. Yet these headline numbers conceal the real situation. More high wage jobs are being lost than are being added and more low wage jobs are being added than being lost. The growth is in service employment at the expense of manufacturing: between 2007 and today, the US has gained 1.4 million waiter/bartender jobs while losing 1.4 million manufacturing jobs. The top four employment sectors pay $10 an hour or less. Behind the overall numbers is, therefore, a massive structural shift in employment toward low wage service jobs. The US middle class is steadily disappearing, which goes a long way to explain the rise and strength of right-wing populism. At the same time, as we have pointed out before, the official unemployment number excludes hundreds of thousands of ‘discouraged’ and ‘marginally attached’ workers, who want to work but have given up looking. When these are included, the unemployment rate jumps from 5.0% to 9.9%. When we look at the reality of US capitalism, the picture is therefore not of a recovery, but of stagnation and unemployment.

To compound the situation, this moribund giant has been hit by the massive decline in oil prices. The large oil companies have cut back spending on exploration by billions of dollars, and fired tens of thousands of employees, but they at least retain profitable downstream activities of refining and purifying. Although the entire energy sector has suffered, shale oil (or ‘tight oil’) producers, who operate exclusively upstream in discovery and extraction, have been especially hard hit: of nearly 200 such companies operating in the US, no more than 20 or 30 are expected to avoid bankruptcy. These companies have taken out huge loans: some 20% of the high yield junk bond market was issued by the energy sector, with a default rate estimated at 25-40%. Many US banks have speculative exposure to shale oil production: Goldman Sachs has about $10.3 billion of exposure to oil and gas; Morgan Stanley has some $15.9 billion – about 15% of its institutional business. The banks need to keep credit lines open to keep wells pumping to pay interest and repay loans. However, the loan collateral, in the form of shale oil reserves, has collapsed in value due to the fall in the oil price, making it difficult for these companies to meet their obligations. Bank of America increased loan loss reserves by $2 billion in the first three quarters of 2015; Citibank added $530m to loss reserves for energy last year and faced a 32% rise in non-performing corporate loans in the last quarter of 2015. Wells Fargo and JP Morgan banks have also increased their reserves.

Bubbles abound: the US stock market has risen into bubble territory. Silicon Valley, home to Apple, Google, Facebook and Netflix has also moved into bubble territory and is poised for a repeat of the 2000 dot com bust. Industrial production was down 0.4% in December and 0.9% in November; in the last quarter of 2015 it fell at an annual rate of 3.4%. US manufacturing is in recession. The new orders index is at a seven-year low. Inventories – unsold products – increased for the fifth straight month. Total US rail traffic is down 2.5%. The national debt has risen from $9 trillion to $17 trillion since 2009.

As anticipated in our last issue, the Federal Reserve Bank has raised interest rates in the US. However, the Fed’s decision is now being second-guessed as exchanges yoyo up and down and amid disturbing economic news from China and the plunging price of oil. Capitalists don’t know whether to buy, to sell or just stick their heads in the sand and hope it all goes away. But, relentlessly, we can see the laws of capitalist production are asserting themselves, preparing further crises as US capitalism struggles to find a way of making a profit.     

Fight Racism! Fight Imperialism! 249 February/March 2016     

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