Worried or Naw? – Slow Growth and a Rising China

So in the past couple of days there have been two big economic news stories. Both were featured fairly prominently across the business sections of mainstream news outlets. But when it comes down to it, the stories were either a) not surprising, or b) nothing to panic over. We’ll start with the former.

U.S. Growth Rates

Q1 growth in the United States was absolutely abysmal with the economy barely etching out a 0.1% growth rate in the first quarter, a full percentage point below the expectations of most economists. It gets even worse. Business and residential investment also fell 2.1% and 5.3% respectively. It’s debatable how much we should panic over these rates and it’s certainly too early to say whether the U.S. economy could fall into recession (two consecutive quarters of negative growth) again, but please, please, please don’t be shocked at these rates. If anything, they’re a reflection of recent trends in the economy and a stark reminder of the fiscal medicine we keep neglecting to take.

Essentially, we’re still stuck in the post-crash rut. Interests rates are at all time lows, but consumers and businesses don’t look like they’re about to start spending massive sums of money any time soon. In this kind of environment, the only economic entity capable of spending enough to support higher growth rates is the government and that’s why we should be extremely worried. 

If you click on the first Quartz link I’ve provided below, you’ll notice another indicator that also declined: government spending. No matter what the President or members of Congress may say, further government support of the economy is a dead horse. Spending is declining at the federal level, state spending has been in retrenchment since 2010, and even the Federal Reserve is starting to taper monetary stimulus.

gdp-blog1
Source: Bureau of Economic Analysis National Income and Product Accounts Table 1.1.2 – Retrieved from Josh Bivens’ Post on the Economic Policy Institute’s Working Economics Blog – 4/30/14 (Link Below)

What’s the result of all this? The economy is moving at a snail’s pace. If you click on the chart above, you’ll notice that federal spending is now at a point where it’s actually subtracting from GDP growth. The state level cuts since 2010 impeded President Obama’s stimulus efforts. By the time the debt ceiling crises had come and gone, Federal spending ceased to provide any additional support. Absent any major changes in Federal policy or the economic environment, growth will continue to reflect these problems. Of course, the big story in this particular case was how slow growth actually compared to economic projections. It may indeed be the case that Q2 growth will be higher. But the pattern during President Obama’s tenure has been repeated up and down swings in growth forecasts with little change felt by the average citizen. As a result, surprise isn’t really called for anymore.

The Chinese Economy

The other major story of the week involved the World Bank’s International Comparison Program declaring that China’s economy may surpass ours as early as this year. The particular measure they used was the Purchasing Power Parity of our respective economies. What’s different about this particular measure is that it doesn’t just rely on exchange rates to adjust for the dollar size of our economy against theirs. It tries to do an evaluation of how much our two economies are capable of purchasing based on a shared price level, in this case price levels calculated from 2011. By that measure, the ICP estimated that China’s economy was already 87% the size of ours three years ago.

Yet despite this clear milestone for the Chinese economy, there really is nothing that the United States needs to be panicking over. For one thing, the Chinese seem to be rather  wary of this report; they denied its findings despite having participated in the data collection phase. Lily Kuo had an interesting piece on Quartz (linked below) regarding the diplomatic implications of an economic status change; it would increase the pressure on them to undertake key market reforms, aggressively tackle environmental problems, and possibly address the Yuan’s exchange rate. They would find it harder and harder to classify themselves as a developing country thereby excusing themselves from further reform.

For another, at some point this was going to be inevitable. China has a population more than three times our size and has been undergoing a rapid economic transformation for the past three decades. That progress has paid huge dividends to their burgeoning middle class while bringing millions out of poverty for the first time; translation: it’s a good thing. To anyone who wants to point out China’s ownership of U.S. Treasury Bills, I say this. 

China has accumulated Treasury Bills totaling about 14% of our total national debt. It did so by running massive trade surpluses and then having no where else to invest that extra cash in. It picked U.S. T-Bills, the safest investments on the planet, not because we needed a banker, but because China had no where else to put its money. In exchange, we got a plethora of cheap economic goods from them. If China ever decided to upset this relationship, we’d lose cheap toys and they’d lose the whole basis of their economy. You tell me who needs to worry now? 

Of course the United States has serious problems, not least of which is our refusal to rescue our own economy. But China’s achievements (presuming we completely accept the ICP’s pronouncement) in no way tolls any kind of bell for America’s future. That destiny remains as it always has: in our hands. 

Chirag

http://qz.com/204604/us-economic-growth-looked-awful-in-the-first-quarter/

http://qz.com/204638/why-china-doesnt-want-to-be-the-worlds-largest-economy-yet/

http://www.epi.org/blog/austeritys-legacy-gdp-potential-climbing/ 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s