Springtime for America
Is America heading for a boom? Real GDP has risen for 13 successive quarters and now stands 3 per cent above its peak level. A net total of 4.8 million jobs has been created over the past three years, with a fall of half a million in the public sector being massively outweighed by the 5.3 million rise in the private.
But welcome and sustained though the recovery is, it hardly constitutes a boom. And it certainly does not when compared with the growth rates seen in the recovery from the last major financial crisis in the 1930s. The slump was of course much worse, with output falling in every single year during 1930-33. The rebound was spectacular. GDP rose by no less than 43 per cent between 1933 and 1937,.
The driver of the recovery in the 1930s was the private corporate sector, contrary to much popular myth about the New Deal and fiscal expansion. Overall for America, 1933 was still a recession year. But this was the year in which corporate sentiment changed. Sharp cut backs in investment meant that in 1932, companies were directly responsible for a reduction in GDP of 5 percentage points. This changed dramatically in 1933, with increases in investment contributing 2 per cent points to GDP. Positive feedbacks meant that the economy then surged. Optimism rose, so investment rose even faster. This lead to increases in employment, so consumers both were and felt better off.
The same potential exists for the US in 2013. One big difference with the Great Depression of the 1930s is that, this time round, companies took much more effective action, much more quickly, to protect their balance sheets. In the 1930s, undistributed profits were negative for four successive years. Since the financial crisis of 2008/09, corporate profits in the US have risen sharply.
Over the five years from 2003 to 2007, inclusive, the annual average value of undistributed corporate profits in America was some $480 billion, or about 3 per cent of GDP. Over the 2009-2012 period, the average has been $800 billion, and it is currently running at an annual rate of $1000 billion.
The myth again persists that it is the public sector which is responsible for the American recovery, in contrast to the wicked austerity programme in the UK. But in the past three years, government current spending has made a marginally negative contribution to GDP growth.
Compared to the years before the crash, US companies are building up cash balances on a massive scale. The increase is of the order of 2 per cent of GDP each year from 2009 onwards, and in 2012 over 3 per cent. Once corporate sentiment turns, investment will boom, many more jobs will be created, and consumer spending will rise even more rapidly as a result.
Once corporate sentiment in America decides that the bad times are well and truly over, we can easily see GDP growth rates of 5 per cent or more.
As published in City Am on Wednesday 30th January 2013