News Column

Recovering Economies

October 18, 2011

Juan Solana, Chief Economist

Unlike the economic situation in 2008, when solid public finances were available to cover the capital needs of failing banks and financial institutions, the current deteriorated financial situation makes it more difficult to resolve a bigger financial need—one arising from U.S. and European debt.

The Great Recession made public revenues plunge while the cost of public programs skyrocketed, resulting in dire public finances here and in key European countries.

During 2010, we observed a resilient and recovering U.S economy that, starting in the first quarter of 2011, faced a political and public sector shock on both sides of the Atlantic.

Although the current slowdown in global economies was mainly caused by a reduction in government consumption, it seems that the politically feasible/possible solution was to reduce demand for goods and services from the public sector.

These policies have had negative impact. Tax policies can shift resources to promote more domestic consumption, but these policies are also a political dead end.

Lastly, monetary policy has lost most of its efficiency, since lowering the price of money no longer triggers investment or buying decisions.

Economic Growth
The U.S. economy was gaining a solid footing in the first and second quarters of 2010, posting an annual growth rate of 3.5 percent. The growth was mainly due to moderate growth in personal consumption (2.2 percent) and strong growth in private investment (25.5 percent). These two components represent about 84 percent of the total GDP, with government representing another 20 percent (the remaining minus 4 percent is due to imports).

An improved employment outlook, moderate growth in consumption and increasing profits should trigger business decisions on increasing investment. For most of 2010, all these factors were aligning to create a cycle that would have resulted in continued economic growth. However, growth in government spending came to a halt in the third and fourth quarters of 2010 and turned negative in the first quarter of 2011. Growth lessened further in the second quarter. This, coupled with rising sovereign debt risks in Europe and natural disasters in Japan produced a contraction in consumption and investment. The result: Economic growth dipped to 1.6 percent in the second quarter of 2011.

The positive dynamics of the third quarter of 2010 are gone and the U.S. economy is facing a negative outlook where reductions in personal consumption and business investment will not be counteracted by increased government spending. Only the resilience of U.S. consumers and existing profits, and possible future investments by corporations, remain as possibilities to re-ignite economic growth in 2012.

Total nonfarm employment added 1,259,000 jobs in the past 12 months. Private sector employment increased 1.7 million while government employment decreased by 450,000. Federal employment decreased by more than 3.5 percent and local government cut 292,000 jobs. In the private sector, notable increases in employment were 500,000 jobs in professional and business services; 412,000 in education and health care; 337,000 in trade, transportation and utilities; and 255,000 in administrative services.

All-time-high Profits
Despite the recession, corporate profits have been growing across all industries except for utilities. In the second quarter of 2011, corporate profits reached a record high of $1.9 trillion, 53 percent more than in the same quarter of 2009. However, there were declines in the rate of profit growth in the second quarter of 2011 compared to the same quarter in 2010. Among the largest Hispanic-owned companies, we observed revenue growth of 5.7 percent in 2010 versus 2009 revenues. Key growing sectors were wholesale (40 percent), construction (25 percent), automotive (25 percent) and finance (19 percent).

Conclusion
The data points displayed above capture a dynamic and resilient U.S. economy ready to recover and come back to full steam. Consumers are (or were) gaining confidence and the aggregate of companies are (or were) posting all-time-high profits; however, hiring remains subdued. Buffeted by debt crises in the U.S. and Europe, lessened government consumption and a monetary policy that is no longer an effective stimulant, the picture of an economy ready to take of is morphing into one in which manmade counteractive factors are working against recovery.


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