Economy in slowdown
By Alex Callinicos
IT LOOKS as if US capitalism's longest party may finally be coming to an end. "Growth has slowed markedly in the domestic US economy in the past few months," the Financial Times reports. "The manufacturing sector has in fact been contracting since midsummer."
For large parts of the world system the past decade has been pretty grim. The Russian economy is less than half the size it was at the beginning of the 1990s. Japan, the world's second biggest economy, has contracted slightly over the same period. China has been in recession for the past three years. Germany and much of continental Europe have stagnated since the early 1990s, with brief bursts of shallow growth. Britain has had a better record, mainly thanks to the fact that its economic cycle is bound up with the United States.
The US economy has kept the entire world afloat, especially since the financial crashes in East Asia in 1997 and in Russia a year later. The longest period of economic expansion in US history has been underpinned by a booming stock market. Profits rose spectacularly thanks to a combination of a brutal squeeze on wages and a wave of investment that cut costs even further.
The expectation that profits would continue to rise at record rates kept share prices moving ever upwards. Middle class investors, feeling richer because the value of their stocks kept on growing, spent more, helping to fuel the boom.
Now this process is beginning to go into reverse. The share prices of the most dynamic sector, the information technology industries, peaked in March. Since then vast amounts have been wiped off the share value of even the biggest companies. Microsoft has dropped from over $600 billion to $280 billion. On Wednesday last week Wall Street fell sharply, with technology stocks suffering particularly badly.
Two forces are driving this process. On the one hand, profits are still increasing, but more slowly than in the recent past. On the other hand, a classic sign of an overheating economy is appearing-over-investment. Companies started huge investments in the expectation that profits would continue to rise at sky high levels, only to find themselves now stuck with unnecessary productive capacity.
The problem is particularly acute in the telecommunications industry. Spending on new equipment has been increasing by more than 20 percent a year for the past three years, while profits have been rising only at 6-7 percent. Lucent, the world's biggest manufacturer of telecommunications equipment, has seen its share price drop by 75 percent.
Meanwhile global economic forces-which helped to sustain the American boom during the 1990s-are now beginning to push the other way. Two factors in particular are important. First, the euro has fallen by 25 percent since its launch in January 1999. This may be politically embarrassing for European leaders, but it makes their countries' exports cheaper on world markets. The German chancellor, Gerhard Schrder, declared recently that he welcomed a weak euro.
Although US Treasury Secretary Larry Summers says he supports the strong dollar, American companies are under competitive pressure from their European counterparts. The US now has a record balance of payments deficit. Secondly, the increase in world oil prices threatens to hit the gas-guzzling US economy hard. American core consumer prices rose by 2.6 percent in September, the biggest increase for a decade. Laurence Meyer, a governor of the US Federal Reserve Board, said last week, "I believe the economy will be ultimately confronted by a transition-and that we may already be in this transition-to slower growth and perhaps also higher core inflation."
Back in the 1970s a name was coined for this combination: stagflation. Of course none of this means that we are necessarily heading towards an economic slump. The last time such a prospect loomed, after the Russian crash in autumn 1998, the Federal Reserve and other Western central banks intervened and cut interest rates to keep the system afloat. But there may be much less room for manoeuvre now.
As the Financial Times points out, "core US inflation is much higher than two years ago. A better comparison might be 1987, when the Fed eased policy in response to a big stock market fall. The central bank then spent the following three years trying to rein back the inflationary forces that its intervention had let loose."
History may not repeat itself. But all the euphoria about the "new economy" is fading fast.