The US economy rebounded in Q2, with an annual GDP growth at 4.0%, after a poor Q1 performance of 2.1 % contraction, according to the
China-US Trade Boosted by Moderate Growth in the US Economy
A week before, the IMF, in its World Economic Outlook released on July 24, 2014, revised its forecast on 2014 global economic growth, marking it down by 0.3% to 3.4% due largely to the drastic US growth rate downside revision to 1.7%, from the previous estimate of 2.8%.
The 4.0% growth rate in Q2 is not an indication of strong growth, nor does the 2.1% contraction in Q1 show any alarm of a new recession. The extremely cold winter disrupted many economic activities, especially construction, out-door consumption and merchandise flows. It is certainly a non-cyclical factor. The high growth rate in Q2 is just a rebound from the ebb, putting the economy back on a moderate growth track. Equally, the poor IMF forecast for the annual US economic growth rate has only statistic meaning.
US Economic Fundamentals Stable
Of all the factors contributing to GDP growth, personal consumption expenditure (PCE) and private fixed investment (PFI) are fundamentals, as the two combined accounted for 83% of total GDP. During Q2 of 2014, PCE grew by 2.5% and PFI by 5.9%, contributing 1.69 and 0.91 percentage points to GDP growth respectively, or 2.6% combined. Inventory changes contributed 1.66%, although the business inventory build-up only increased by $68.2 billion, approximately 1.8% of total GDP. Net exports contributed -0.61% due to the imports growing faster than exports. However, faster import growth means a better economy. Therefore, the contributions by inventory changes and net exports have only statistical value and are not representative of the country’s economic fundamentals.
Examination of the contributions by PCE and PFI over recent years has revealed an amazingly stable growth rate between 2.3-2.6%. The two combined pushed GDP growth by 2.41% in 2011, by 2.42% in 2012 and by 2.34% in 2013, followed by a non-cyclical 0.86% in Q1 of 2014 and again 2.60% in Q2. In other words, the US economy, judged by the fundamentals, has been growing at roughly an annual rate of 2.5%, which is pretty stable – neither strong nor weak. If we follow this track, the growth could be estimated to continue at a similar tempo for the rest of the year.
Among various factors affecting changes of the fundamentals, the decisive one affecting PCE is, in most cases, the changes of disposal personal income (DPI). DPI increased by a mere 2.2% over 2013 annual average in nominal terms during Q1 of 2014. Personal consumption outlays increased only 1.2 % during the same quarter. During Q2 however, DPI increased by 3.7%, and the personal consumption outlays rose by 3.3%. Hence a positive linkage appears.
Similarly, PFI is affected, in most cases, by the changes of after-tax corporate profits (ATCP). In 2012, ATCP increased by a hefty 9% and private fixed investment increased by a robust 8.3%, contributing 1.17% to GDP growth for the year. In 2013, ATCP growth slowed to 4.1% and the private fixed investment growth also slowed to 4.7%, contributing 0.70% to that year’s GDP growth. Again, a positive linkage appears. We have only the corporate profits data for Q1 of 2014, which is very bad due to the severe winter, off 15.5%. Nonetheless, as the cyclical factors again dominated during the second quarter, a strong rebound is almost certain.
As the general trend of disposal personal income and after-tax corporate profits has shown a stable, moderate growth and is likely to continue, the economic fundamentals will follow a similar trend, growing at around 2.5% for the latter half of the year. It would be more difficult to estimate the growth rate of GDP, as the factors of net inventory changes and net exports vary.
Moderate, Not Strong
Although it is stable, the US economy is a long distance away from being strong. As has been proved repeatedly by previous economic cycles, a strong growth is usually based on massive investment in equipment and infrastructure. The current recovery, however, lacks that base. Structures (plant building) investment fell by 0.5% in 2013, only recovered to 2.9% and 5.3% growth in Q1 and Q2 of 2014 respectively. Equipment investment rose by 4.6% in 2013, fell by 1.0% in Q1 of 2014 and rebounded by 7.0% in Q2. Considering the low base in Q1, Q2 growth is not strong. The more important driving force – massive infrastructure investment – is still at a low level. According to Alan Greenspan, unlike the previous 10 recessions after which massive infrastructure investment led to strong recoveries, there is a lack of that type of investment this time. The current fiscal and monetary policies are not adequate to bring a strong growth.
The Federal Reserve’s unconventional monetary policies, including zero interest rates and quantitative easing (QE), have played an essential role in supporting the moderate recovery. The QE however, while pushing up asset prices, cannot bring massive investment and innovation in the real economy. The DJIA index rose by 26.3% during the past 19 months from the end of 2012 to early August 2014. During the same period of time, the industrial production index and manufacturing production index rose only 5.8% and 4.6% respectively, and GDP grew by an aggregate 2.7%.
The two major measurements for QE and its tapering are CPI (no higher than 2.5%) and the unemployment rate (no higher than 6.5%). However, both are no longer that indicative of the state of the economy. During the past 12 months CPI stood at 2.1%, comfortably below the threshold. Still, the Fed started tapering QE six months ago. The jobless rate, at 6.2% last month and already under the threshold, does not forecast a positive employment situation. An important reason behind this bright figure is that more and more people out of work did not return to the labor market for new jobs. Of the entire civil non-institutional population of 248.02 million in July of 2014, 92 million did not participate in the active labor force, with a labor participation rate of only 62.9%. Five years ago, in July 2009, the worst period after the global financial crisis, the labor participation rate was 65.5%, with a jobless rate of 9.5%. If we had the same 65.5% labor participation rate for July 2014, the comparable jobless rate would have been 9.9%! Hence, the Fed has lost its bearings in deciding to taper QE.
It is unlikely that the federal and state governments will have sufficient resources to initiate massive investment in infrastructure at the moment, and, at least in the short term, the economy is expected to grow at a moderate pace.
Good for China-US Trade
The United States’ economic recovery, albeit moderate, is good for overseas exporters. During the first seven months of the year, Chinese exports of good to the US increased by 6.3% over a year ago, while its global export growth was 3.0%. The US market performed twice as good as the global market. In July alone, exports to the US shot up by 12.3%, contributing 2.1% to China’s global export growth.
Since the start of the year, this fact has led to increasing the RMB depreciation argument. While it is an issue for separate discussion, a second look at the whole picture might give a better understanding. It remains to be seen whether the July trend will continue. According to US Census data, its goods imports increased by 3.3% worldwide during the first half of 2014, with the portion from China increasing by 5.4%. However global import growth from the US has dragged down 5.1% due to the fall in petroleum imports. If that sector is excluded, which is more comparable (China exports virtually no petroleum or its by-products to the US), US imports increased by 4.9%, very close to the 5.4% increase in imports seen by China.
According to China Customs statistics, Chinese imports worldwide increased by 1.0% during the first seven months of the year. Imports from the US, however, increased by 5.0%, far outperforming its global imports. In the month of July, Chinese global imports fell by 1.5% year over year, but those from the US increased by 5.9%.
With the economy stabilizing and growing around 7.5% annually, it is widely expected that Chinese imports will pick up during the second half of the year, providing more opportunities for the US exporters. In turn, moderate growth in the US economy will also provide continuous chances for Chinese exporters. It can be well anticipated that the China-US two-way trade will outperform each country’s global trade for the whole year of 2014.
He Weiwen is co-director of the China-US/EU Study Center at the China Association of International Trade.