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Has U.S. Delayed Economic Recession?

Dec 21, 2023
  • Yu Xiang

    Senior Fellow, China Construction Bank Research Institute

US economy.jpg

The intricate and diverse landscape of the United States economy has always captured global attention, given its substantial influence on critical domains such as financial markets and global supply chains. This year, it has appeared to be in a favorable condition according to available data, despite the backdrop of sustained interest rate hikes. The U.S. economy celebrated a series of noteworthy policy accomplishments, including sustained record highs in the stock market, a steady decrease in unemployment and robust GDP growth.

If these trends hold, the Biden administration may be credited with achieving a historic economic miracle that secures a lasting place in the annals of human economic achievement.

However, a closer examination of the U.S. economy reveals nuances that paint a less rosy picture. 

I. "Color differences" in U.S. economy 

Manufacturing stands as a pivotal pillar for the U.S. in its ascent as a global economic powerhouse. Nevertheless, with the ascendancy of financial capital, manufacturing has gradually been relegated to the sidelines. The financial crisis of 2008 compelled the U.S. to address the hollowing out of manufacturing.

The Obama administration responded by proposing a manufacturing revival strategy and implementing a series of corrective policy measures. Building upon this legacy, Joe Biden took office and continued to champion the revival of local manufacturing in the country. This year, U.S. manufacturing investment is witnessing heightened activity, which is being hailed as a super cycle.

According to Federal Reserve economic data, since the end of 2022 U.S. manufacturing investment had surged from $133.2 billion to $194.3 billion as of May this year. Manufacturing plant investment is up 80 percent, contributing approximately 0.4 percentage points to GDP growth in the first half of the year. The U.S. government has proudly touted this accomplishment, with Biden personally demonstrating solidarity with workers by appearing on the picket line of an auto worker strike in Chicago — a bold move that marks him as the first postwar president to visit a strike site and openly support workers in their standoff with capitalists.

Does reality align with this statement? We can explore this matter through the lens of economic common sense. Typically, under current production conditions, economic growth — especially the expansion of manufacturing — is accompanied by a rise in the consumption of electricity. However, it is noteworthy that in the first half of this year, while U.S. GDP increased by 2.3 percent, electricity consumption saw a year-on-year decrease of 3 percent. Despite the rapid development of manufacturing, electricity consumption has not surged. It’s plausible that the upswing in industrial electrical consumption is counteracted by reductions in residential and commercial electrical consumption. Yet, in practice, all three sectors — industrial, commercial and residential — have experienced declines.

The most recent short-term energy outlook from the U.S. Energy Information Administration, which was released in September, even forecasts a continued drop in U.S. electricity consumption throughout 2023, with a year-on-year decrease of 1.26 percent. This includes a 2.69 percent reduction in residential electricity consumption, a 1.8 percent drop in commercial electricity consumption and a 1.39 percent decrease in industrial electricity consumption.

Additionally, under the Biden administration’s manufacturing revival strategy, manufacturing jobs have stagnated at approximately 13 million since January, showing no significant increase — only around 200,000 more jobs than at the beginning of 2020. Despite the manufacturing industry entering a supposed super cycle, it hasn’t translated into a notable boost in employment. Is it plausible that the expansion of manufacturing is primarily concentrated in high-tech fields where there are fewer job opportunities? This scenario contradicts the goals of “Bidenomics,” which aims for a comprehensive manufacturing revival that will generate more local jobs.

Further, the Institute for Supply Management (ISM)  manufacturing index has consistently remained below the manufacturing PMI threshold of 50 since December last year, persisting in a continuous contractionary zone for 11 months. The question arises: Has the U.S. manufacturing industry genuinely entered the so-called super cycle”?

Third, logistics data do not support the conclusion that there is rapid economic development in the United States. Renowned American investor Cathie Wood, the founder, CEO and CIO of Ark Invest, recently cast doubt on the U.S. government’s economic data, citing UPS revenue data for comparative analysis. Upon examination it was discovered that despite the relative market share of several major express companies remaining largely unchanged, UPS’s daily average number of express shipments decreased. This implies that the overall express market is contracting rather than being overtaken by other logistics companies in express delivery. Additionally, FedEx Group predicts that this year’s U.S. logistics volume will be 25 percent lower than the same period last year.

Fourth, employment figures also present inconsistencies. Throughout this year, technology companies in the United States have significantly downsized their workforces. Notable companies, including Google, Facebook, Walmart and Amazon have experienced continuous layoffs. Nevertheless, U.S. employment numbers continue to depict a surprisingly positive situation, with unemployment rates dropping and even hitting a 50-year low at one point.

In early October, the United States released two sets of employment data with significant disparities. According to the U.S. Bureau of Labor Statistics, the number of new non-farm jobs in September surged by 336,000, exceeding the market expectation of 170,000. However, ADP, a payroll-processing company, reported that the number of non-farm jobs in September increased by only 89,000, falling far short of the market expectation of 153,000.

ADP’s employment data focuses on the employment situation in the private sector in the United States. It excludes government employment, resulting in a narrower scope compared to official non-farm employment data. While differences between these two sets of data are not uncommon, September witnessed a pronounced divergence between large and small non-farm data in the United States. Moreover, other indicators measuring employment growth may not be as optimistic as suggested by the non-farm employment data. Mark Zandi, chief economist at Moody’s Analytics, contends that actual monthly employment growth may be significantly lower than the official report.

In addition to market participants, the Federal Reserve has observed an inconsistency between micro and macro data. The minutes of the Fed meeting in June revealed that some Fed officials have begun to question the robustness of non-farm employment numbers, expressing concerns that these figures may exaggerate the overall health of the labor market. 

II. Seeing the differences 

There are instances where statistical methods can account for discrepancies between economic data and actual conditions, but there are also cases where they fall short. Determining the extent to which subjective factors contribute to these disparities is challenging, but the problem demands attention. 

Explanation 1: Statistical methods can lead to data deviation. Consider employment statistics, where the International Labour Organization defines the employed population based on the number of job positions — an approach mirrored in U.S. non-farm employment data. For example, a worker who is engaged in up to 10 part-time jobs, totaling 35 hours per week, is categorized as a full-time worker. Conversely, the unemployment rate, which is derived from the total population, factors in the willingness of workers to engage in employment. Consequently, individuals unwilling or unable to work because of physical reasons are excluded from the unemployment data. According to the Brookings Institution in 2022, an estimated 2 to 4 million workers are unable to work as a result of lingering COVID effects; consequently, they are not factored into the unemployment statistics.

Such statistical anomalies partially account for the disparity between the actual number of unemployed individuals in the United States and the unemployment rate reported in official data, which remains artificially low. Notably, certain discrepancies cannot be solely attributed to statistical methods. For instance, throughout the current year, the U.S. government has consistently revised previously released employment figures downward.

Initial employment data typically present an overly optimistic picture, prompting corresponding adjustments in Federal Reserve interest rates. Subsequently, the government revises the data during subsequent releases, raising concerns about frequency. While occasional occurrences might be chalked up to statistical errors, frequent revisions suggest either significant issues with the statistical methodologies or deliberate manipulation. They frequently create an opportunity for officials to exploit the “multiple releases” loophole to influence the market and shape expectations. 

Explanation 2: An alternative, as outlined in Thomas Dunning’s book “Trades’ Unions and Strikes” posits that some companies may inflate their data to secure government subsidies. Dunning suggests that where there is a profit margin of 300 percent, capitalists are willing to take the risk. This scenario raises concerns that certain businesses, under the guise of revitalizing manufacturing, might seek short-term profits by obtaining federal subsidies, with limited evidence that these funds contribute to genuine manufacturing development. 

Explanation 3: A concealed grand strategy has been designed to camouflage the deep-rooted issues within the U.S. economy. Its primary objectives are to delay the recession of the U.S. economy by manipulating economic data, enticing additional capital into the U.S. and employing surplus funds in the capital account to offset losses within the current account.

Reflecting on historical precedents, the significant gains of the U.S. dollar have consistently coincided with the exploitation of other nations’ wealth. Yet the current voracious appetite and deficit of the United States surpasses the capacity of smaller countries to satiate it, prompting a redirection of financial warfare toward larger nations. The Biden administration is embarking on a risky course — a gamble exacerbated by the Federal Reserve’s continual interest rate hikes. This has notably increased the pressure of overseas U.S. dollar debt on China’s real estate enterprises. 

All these intricate factors interweave to form a multifaceted economic landscape. It is imperative that we remain vigilant, delve into a more comprehensive analysis of the covert realities behind the U.S. economy, scrutinize effective risk prevention strategies and adeptly navigate the ever-evolving economic maze. 

III. Trends Worthy of Attention 

The apparent contradictions of economic data may serve as a smokescreen, concealing the genuine state of the U.S. economy and misleading investors ensnared in its allure. This fog, however, not only perplexes external observers but also confounds its creators, rendering them incapable of gauging the severity of the underlying problems. Just as Tesla CEO Elon Musk’s “super bad feeling” about the economy could be the canary in the coal mine moment, signaling a recession in the auto industry, whose bosses have shown no signs of concern. 

Considering that the actual state of the U.S. economy might not align with the optimistic data, the following four trends merit our careful consideration: 

(1) The momentum behind the revitalization of American manufacturing appears to be showing signs of potential slowdown. Over the past 18 months, U.S. statistical data have allowed us to observe the continuous growth of foreign direct investment in American computers and electronic products — from $170 million in 2021 to $54 billion in 2022, constituting 66 percent of the total new FDI that year. However, the sustainability of this trend raises questions.

Initially, if American manufacturing were actually as robust as the data suggest, the government may not find it necessary to promote it strongly. People would just know. Yet, if governmental backing diminishes, uncertainty lingers over whether U.S. manufacturing can independently recover. If the stimulus persists, it risks adversely affecting other industries. According to a report from the White House Economic Council on Aug. 23, the surge in manufacturing investment does not originate solely from new capital inflows but rather from fund reallocation from other sectors. Government tax incentives and policy supports entice investors to shift to manufacturing. If such financial backing persists, it could continue to divert investment from other sectors, potentially having a negative impact on the overall economy. 

(2) A substantial downward adjustment in the U.S. financial market could be on the horizon. If the Federal Reserve maintains a tight monetary policy based on optimistic economic data, confidence in the U.S. financial market may erode, leading to an investor exodus and sharp market fluctuations. From the start of this year to Aug. 9, the Nasdaq index surged by an impressive 57 percent, with the top 10 companies contributing 91 percent of the increase.

Small-cap companies struggled. These companies, with a market capitalization below $2 billion (3,079 of them) experienced only a modest increase in market value, amounting to 1.11 trillion, nearly a quarter of the S&P 500 market capitalization and equivalent to the GDP of three Germanys. However, the total market value of the remaining 493 companies in the S&P 500 index barely increased at all.

Technology stocks, which are particularly sensitive to interest rates, face downward pressure if rates remain high, and a significant dip in technology stock prices could trigger an avalanche in the U.S. financial market. If a sustained downward adjustment occurs, the U.S. economy may encounter a significant growth slowdown as early as the fourth quarter of this year. Vigilance is crucial, and closely monitoring market dynamics is imperative in formulating effective risk-prevention strategies. 

(3) The real estate market may encounter turbulence, reminiscent of the volatility observed in technology stocks. Similar to the tech sector, the real estate market exhibits sensitivity to fluctuations in interest rates. Current data reveal a significant disparity in vacancy rates between office-type commercial real estate and industrial/logistics real estate in the United States. The Federal Reserve’s persistent tightening of monetary policy has escalated financing costs within the real estate industry, particularly impacting long-term, low-liquidity assets, such as commercial real estate. This sector faces substantial revaluation pressure.

The financial health of commercial real estate investors is deteriorating, leading to an increased risk of default. IMF President Kristalina Georgieva issued a warning on Oct. 6 highlighting the fact that tightened credit is exerting pressure on the U.S. real estate industry, especially in the commercial segment.

The flourishing cycle of the U.S. real estate market might come to an end because of elevated interest rates, with the initial repercussions likely visible in the commercial sector. This could trigger a domino effect, rippling through the broader real estate market. Subsequent to the decline in housing prices, there could be a reduction in consumer spending and a deterioration in the quality of bank assets. 

(4) Achieving the big strategy of delaying recession in the U.S. economy by manipulating economic data to attract capital through interest rate hikes in the U.S. may prove challenging. The ability of the U.S. to sustain international capital inflows does not hinge solely on economic data presented by officials but also on investors’ broad assessments of geopolitical and military conflict risks.

Additionally, perceptions acquired through microscopic attention to the so-called temperature difference between official data and actual conditions play a crucial role. In essence, continual scrutiny and exploration of the disparities between the real performance of the U.S. economy and its data are imperative. Timely responses to the uncertainties surrounding the U.S. economic prospects are essential, necessitating a steadfast focus on global economic trends. 




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