THE U.S. ECONOMY COULD BE SO MUCH WORSE

….The above graph shows that China is moving their nation into a service economy.

 

Those that want America to be an isolationist nation would doom the US economy.

 

With many of the world’s economies in the doldrums today, even the head of the Peterson Institute for International Economics, Adam Posen, has said that, “Among the world’s major economies, America’s is the least ugly.”  So, here’s a complete explanation of what Mr. Posen is saying.

 

To understand what is going on with the world’s and the US economy, here are the facts.

 

The emerging market nations, China, Brazil, India, etc., they are doing better than the advanced economies of the United States, Europe and Japan.  China, whose growth had been at 10%, is now down to 6%, and it is expected to go much lower.  The US that had been at 4% annual growth, will now continue at only 2%, but when compared to the rest of the world, that’s almost stellar.

 

Those 19 countries that use the Euro, those will grow at a rate this year of only 1.5%, while Japan will grow at a rate of 0.4%

 

The official IMF and the World Bank forecasts are similar, and they convey the same central message: “Mainstream economists are resigned to prolonged economic sluggishness world-wide.”

 

The Republicans candidates keep talking about how the Obama economy has hurt their constituencies.  The reality is that the world economy is in the tank, and the US economy isn’t great, but it could be a whole lot worse.

 

Here’s what I’m talking about: From 1997 to 2006, the world economy grew at an annual rate of about 4%, the “emerging market” countries of China, Brazil, India, etc., outpaced the advanced economies of the United States, Europe and Japan.  Now the major economists are projecting a world growth at only 3% annually. “Emerging market” economies will still grow faster, but the gap between these two has seriously narrowed.

 

So you ask, “What is the dollar difference between a 3% world  growth and 4% growth?”

 

The difference between 3% and 4% of global growth is a big deal.  At current exchange rates, the output of the world economy is about $75 trillion in US dollars.  One percentage point of growth is worth $750 billion worth of added goods and services. With inflation, the gap between 3% and 4% expands every year. After a full decade, this gap would exceed $7.5 trillion in inflation-adjusted dollars.

 

Today, according to the Peterson economists, the US economy still benefits from a recovery in our housing construction and sales.

But there are worries about a recent slowdown with young American delaying the acquiring of a new home.  Many are deciding to stay with renting an apartment or living in their parents homes.  This is slowing the housing rebound, but the economists thinks this dip is temporary.

 

The big concern for economists though is not the US economy or the nations in Europe, it’s China.

 

The biggest threat to the global economy is if there is a collapse of China’s growth.  China’s role as a chief trading nation, a collapse would also drag down those countries that supply it with raw materials and semi-manufactured goods.  But the economist Nicholas Lardy, a China specialist at Peterson, he discounts the danger. China, he argues, is making a successful, if bumpy, transition from a manufacturing and  industrial economy to a service economy.

 

China’s bureau chief, Wang Baoan, told a news conference that this year will see accelerated restructuring, with some older industries declining while the new service businesses are “vigorously developing, further stimulating the vitality of the market.”

 

As the graph above shows, the service section of their economy grew from 48.1% to  50.5% in one year.  Growth in the industrial sector slowed sharply to 6.0% in 2015 from 7.3% in 2014 while services expanded to 8.3% last year from 7.8% a year earlier.

 

After years of Chinese leaders saying the economy needs to shift away from growth driven by their investment in factories, roads and other assets, a slowdown now entering its sixth year is making that transition more necessary than ever. As the world’s 2^nd largest economy to the United States, China has accounted for up to 1/3 of global growth in recent years.  Therefore, the gearing up of services and consumption seriously matters at a time that many other emerging and developed economies are sagging.

 

But some economists have said the government in China is setting growth rates too high and will have to spend heavily to meet them.

 

Such spending sprees in China have typically favored the old economic drivers of the less-efficient state companies and industries, some afflicted by excess capacity.  This spending is done in part to avoid disruptive layoffs and bankruptcies.

 

“Government policies are slowing the transition by still propping up some old industries, in an effort to spread the pain over multiple years instead of a quick one-year adjustment,” said IHS Global Insight economist Brian Jackson.

 

According to Minsheng Securities Co., China’s infrastructure spending would need to grow by at least 18.7% this year for the country to reach the 6.5% target.

 

So, the point of all this is, whether we like it or not, we are securely in a globalized economy, and it’s important that all the world’s economies work together to help those in need for reaching their goals.  What goes on in the 2^nd largest world economy will affect all the economies in the US, Canada, Europe, South and Central America and beyond.

 

The isolationist approach offered by some of our Republican candidates are just continuing to show that their approach would eventually doom the American and other friendly world economies.

 

Copyright G.Ater  2016