by Michael Roberts
The final figures for US real GDP in the second quarter of this
year (April to June) were released at the end of last week. They showed
that the US economy was growing at an annual rate of nearly 4% (3.9%)
in the summer after yet another poor first (winter) quarter of just 0.6%
growth. So, compared to summer 2014, the US economy has expanded by
2.7%. Indeed, the US economy has been growing at that sort of rate for
the last four quarters.
However, before the cry comes that, finally, American capitalism is
back on a sustained trend in growth similar to that before the Great
Recession, there are some caveats.
First, the growth in gross domestic income (as opposed to product) is
much slower. GDI slowed to just 2.1% yoy in Q2 2015. Gross domestic
income is the income received by American homes and businesses. If
gross domestic product grows more, it means more of the value of that
domestic production has gone to foreign businesses and abroad.
Second, the reason that GDP growth seems to have picked up in the
second quarter is that for virtually the first time since the Great
Recession, the government sector expanded. In Q2, America’s states (not
the federal government) contributed 12% towards US economic growth,
instead of reducing it, as healthcare spending rose.
Also, although business investment rose, it contributed a relatively
smaller proportion towards GDP growth (20%) compared to previous
quarters and years since the end of the Great Recession. Growth was
mainly achieved by households buying more cars, electrical goods and
spending more on healthcare (Obama-care?) and taking out mortgages to
buy more homes. US growth is consumer-driven and debt-financed (with
interest rates at all-time lows).
But the most sobering caveat is that in the current quarter (Q3) just
ending this week, US real GDP growth looks likely to have slowed down
sharply from that near 4% rate to something close to 2%. Indeed, the
Atlanta Federal Reserve real GDP forecasting indicator, which has been very accurate in the recent years, forecasts just a 1.4% growth rate for Q3.
And the forecast slowdown is not really surprising because economic
data in this current quarter has been very weak: factory orders, retail
sales, durable goods orders, industrial production etc.
Alongside this US slowdown, the major capitalist economies, both advanced and so-called ‘emerging’, have been slowing. According to the OECD, economic growth in the 34 major advanced capitalist economies grew
by only 0.4% in the second quarter of 2015 from the first quarter – a
deceleration from the 0.5 per cent quarter-on-quarter growth achieved in
the first three months of this year. Year-on-year GDP growth for the
OECD area remained unchanged at 2 per cent in the second quarter of
And in this quarter of the year, global growth seems to have slowed
even more. The UK economy, which was the leader in the top G7
economies, may struggle to achieve 2% growth, while Germany, France,
Japan and Italy will be closer to 1%. And the major ‘emerging’
economies are diving. We have all heard about China slowing fast, leading to slowdowns in Australia, New Zealand and most of south-east Asia.
But on top of the ‘China crisis’, there are outright slumps in Brazil
and Russia and low growth in Turkey, South Africa and Indonesia. Even
India’s real GDP growth, which has been racing along at about 7% a year,
turned down this quarter. The global crawl is turning paralytic.
World trade is heading back to the depths of the Great Recession.
Indeed, the latest update of my global business activity index (based
on purchasing managers indexes around the world), shows a sharp
contraction in activity among emerging markets.
So it is no wonder that the US Federal Reserve drew back from its planned hike in interest rates in September.
The Fed statement specifically highlighted the global economic slowdown
as the reason for holding off (at least until December). The Fed,
along with many mainstream economists, that hiking US rates would spill
over into higher cost of borrowing and debt servicing and possibly
trigger a collapse in stock and bond markets globally – something I have
highlighted before as another ‘1937’.
Several financial strategists are already worried that stock markets are
overvalued compared to future earnings and profits. And that’s what the
‘Warren Buffet’ indicator of the value of corporate stock to GDP shows –
That’s where the latest data on corporate profits come in. In Q2
2015, US corporate profits, after taking into account inventories and
depreciation (in other words, new profits), rose just 0.6% compared with
summer 2014 and, after tax, actually fell 0.6%.
And there was a sharp increase in dividends paid out to shareholders
by corporations. So the available profit for investment has dropped
4.6% compared to summer 2014. Moreover, two-thirds of the rise in
profits in Q2 2015 accrued to the financial sector with just one-third
to productive sectors.
Globally too, corporate profit growth remains low. Indeed, without a
sharp rise in Japanese corporate profits in Q2, growth would have been a
trickle. Indeed, Chinese industrial profits fell nearly 9% in August
compared to August 2014.
Looking out longer term, a new report from the management consultant, McKinsey (MGI Global Competition_Executive Summary_Sep 2015) reckons that “the
world’s biggest corporations have been riding a three-decade wave of
profit growth, market expansion, and declining costs. Yet this
unprecedented run may be coming to an end”. According to McKinsey, the global corporate-profit pool, which currently stands at almost 10% of world GDP, could shrink to less than 8% by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years.
From 1980 to 2013, vast markets opened around the world while
corporate-tax rates, borrowing costs, and the price of labour,
equipment, and technology all fell. The net profits posted by the
world’s largest companies more than tripled in real terms from $2
trillion in 1980 to $7.2 trillion by 2013, pushing corporate profits as a
share of global GDP from 7.6% to almost 10%.
But McKinsey reckons that profit growth is coming under pressure.
This could cause the real-growth rate for the corporate-profit pool to
fall from around 5% to 1%, practically the same share as in 1980, before
the boom began. So the great neo-liberal period of corporate profit
recovery is over. According to McKinsey, margins are being squeezed in
capital-intensive industries, where operational efficiency has become
critical. Meanwhile, some of the external factors that helped to drive
profit growth in the past three decades, such as global labour arbitrage
(globalisation) and falling interest rates, are reaching their limits.
As I have argued on many occasions, from
the movement in profits flows the movement in investment and then to
overall economic growth. If profits, both globally and in the US, start
to fall, then eventually so will investment and the slow economic
growth recorded in the major capitalist economies since 2009 could turn
into a new slump.
Economic recessions or slumps seem to occur about every 8-10 years in
the post 1945 period (1958-60, 1970, 1974-5, 1980-2, 1990-2, 2001,
2008-9), the so-called business cycle. If that cycle is to reoccur,
then the next recession is due between 2016 and 2018 (given that the
last began in 2008).
I have argued that we can discern a profit cycle as well as a business cycle (see my book, The Great Recession).
The cycle of profitability is about 32-36 years, trough to trough, in
the US. The last trough was in 1982, followed by the so-called
neoliberal revival in profitability until 1997-00. The current downwave
should therefore trough no later than 2018. If this is right – any
scientific analysis worth its salt should make predictions that can be
proved wrong (or right) – then profitability in the US should be heading
downwards pretty soon. All this suggests a major slump within 1-3
The world economy is still crawling along, but interest rates are at
all-time lows and stock markets are way overvalued. Any shift up in the
cost of borrowing and any shift down in profitability would turn that
crawl into crash.
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