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The U.S. Economy

For several years we’ve analyzed the sluggish course of the world’s most powerful economy. After the short-lived recession of 2001, the economy has limped along for several years, never technically dipping back into recession, but never really taking off as it did in the 1990s.  This “jobless” expansion has been based entirely on the relentless squeezing of the U.S. and world working class. Over this period, worker productivity and corporate profits have increased tremendously while wages and job growth have stagnated or fallen behind. In other words, fewer workers are doing more work for less pay, leaving more profits in the pockets of the capitalists. So although overall GDP has continued to grow, very little has “trickled down” to the mass of the population.  In fact, things are far worse now for the majority than they were just 25 years ago. For millions of U.S. workers, this boom has seemed more like a prolonged recession.

In the overall context of the global division of labor, the U.S. is being transformed from an economy based on manufacturing to a services-based economy, which requires a brutal “re-tooling” of the American working class. The capitalists do not invest in order to create jobs or to improve the quality of life of “their” country’s workers – they invest to make profits.  They will invest wherever they can in order to maximize their returns. The capitalists are therefore forcing U.S. workers to compete on the world labor market with workers earning far lower wages, and working and living under far worse conditions. In order to compete in this new world environment, there is only one solution for the capitalist class: to take back the relatively high wages and decent conditions won through bitter struggle by U.S. workers in the past. In the last 25 years, U.S. workers have been faced with unprecedented wage and benefit cuts, mass layoffs, off-shoring, worsening conditions, and the decimation of the unions.

However, in society as in nature, everything has its limits.  American society does not exist in a vacuum.  As in every country dominated by capitalist property relations, the U.S. is a society with tremendous class divisions and contradictions. Also in society as in nature, every action has an equal and opposite reaction. The sharp, sudden changes being forced on U.S. workers are preparing an inevitable reaction against these attacks.  The capitalist class’ relentless pursuit of profit is a finished recipe for tremendous explosions of the class struggle in the coming period. Already, there are symptoms of this, for example the movement of immigrant workers and the growing ferment in many trade unions.

At the root of this instability and these contradictions is the economy. Economic forecasts are among the most difficult of predictions, based as they are on incomplete and past data.  But over the past few months, there have been many indications that the “joyless” recovery is losing steam, and that the economy may well sink into a recession at some point in the not-too-distant future. The data is contradictory and no single month’s numbers can give us the full picture. But it is clear that this is not the steady, robust growth experienced during the post-war boom or even the expansion of the 1990s.  This is an uneven, disjointed expansion that has not even nominally benefited working people. So while it is impossible to say with any precision just when a recession will come, what can be said with certainty is that as long as capitalism continues, so too will the boom-slump cycle.  What goes up must come down, even if it has not gone up very far. Until capitalism is overthrown by the conscious efforts of the working class, it will always find a way out of its problems – on the backs of the workers.

GDP continued to grow in the fourth quarter of 2006, but at a rate of just 2.2 percent, which was far lower than the 3.5 percent rate initially predicted. This was the sharpest downward revision in a decade, and was attributed to weak business spending and a lowering of inventories by companies. The Federal Reserve predicts GDP will grow between 2.5 and 3.0 percent in 2007, compared to 3.3 percent in 2006. However, even this modest rate of growth is barely enough to keep up with inflation and the weakening dollar, and in no way compares with the robust pace of previous expansions. In an effort to spur growth, the Federal Reserve has held its base interest rate at 5.25 percent since August 2006, after raising it 17 times in a row. But the threat of inflation complicates their monetary policy.

Core consumer prices rose 0.3 percent in February, following a 0.2 percent gain in January. This is up 2.4 percent compared with a year earlier. But in terms of real year-on-year purchasing power, inflation is actually higher than the official figures suggest. It is important to note that “core” inflation does not include food and energy prices, which have seen rapid rises over the last two years, and which especially affect working people. The average retail price of gasoline was up 5 cents, or 1.5 percent, in February, which impacts sales in other areas of the economy. The Federal Reserve is therefore caught between a rock and a hard place. To tame inflation the usual policy would be to raise interest rates, but signs of a slowing economy is pushing them in the direction of lowering rates in order to encourage spending and investment. No matter what course they follow, it will create imbalances in other parts of the economy. Their tightrope act of trying to keep the economy more or less on an even keel by raising and lowering interest rates grows more precarious every day.

Weighing like a ton of bricks on the upward mobility of the economy is the federal debt, which currently stands at a mindboggling $8.8 trillion. Every year since 1969, Congress has spent more money than it has brought in in taxes. To make up the shortfall, the Treasury Department has to borrow money to meet the government’s expenses. In fiscal year 2006, the U.S. government spent $406 billion just on paying the interest on this debt. To put this into perspective, the total spent on education in 2006 was $61 billion. The annual interest paid on the national debt is now the second largest single area of federal expenditure, after the Department of Defense.

The trade deficit and the steady decline of the dollar are also factors weighing on the economy. The “current account” deficit is the broadest measure of trade and investment flows, representing the debt owed by the U.S. to the rest of the world. It includes trade in goods, services and investment income. This deficit reached $805 billion in 2005, which was 20.5 percent greater than in 2004, and more than double what it was just 4 years earlier.  In 2006 it jumped a further 8.2 percent to a record $856.7 billion, which represents 6.6 percent of GDP. Compare this to current account surpluses of 9.1 percent in China and 3.9 percent in Japan. The imbalance was largely due to high oil prices and continued cheap imports from China. In order to make up the difference between what is sells abroad and what it imports, the U.S. must borrow over $2 billion every day. It does this by selling U.S. Treasury securities to foreign investors, mostly to Japan and China. Over half of U.S. government securities are now owned by foreign investors.

Although the monthly trade deficit narrowed 3.8 percent to $59.1 billion in January, this is more a reflection of the weakening dollar than an actual improvement of U.S. exporting power. The dollar reached a new low against the Euro and other major currencies in April, which means that while Americans can afford to buy less foreign goods, American products are more of a bargain for those buying with currencies such the British Pound, Euro, and Canadian Dollar. The net result is a slightly lower, albeit still colossal trade deficit, but this does little to address the long-term imbalances.

For 31 consecutive years the U.S. has imported more than it exports.  The only area where the U.S. maintains an import-export surplus is precisely in the services sector, with a $70.7 billion surplus last year, compared to $66 billion in 2005. In 2006, for the first time in decades, net payments to foreign investors on their U.S. investments turned negative. From a surplus of $11.3 billion in 2005, the U.S. had a deficit of $7.3 billion in 2006. This is another graphic reflection of the U.S.’ decline from being an industrial, creditor nation, to a service-based, debtor nation.

Debt in the U.S. was up an incredible 10.1 percent last year, for a total of $4.085 trillion, accounting for a staggering 58.8 percent of all the credit issued worldwide. This is an astonishing figure, considering that the U.S. makes up just  5 percent of the world’s population. This represents an increase in indebtedness far greater than the rate of GDP growth. The extension of credit can artificially expand the limits of the market for a certain time, but eventually, all of this must be paid back – with interest.

There are always ebbs and flows in the movement of the economy, even within each cycle of expansion and contraction. And while no single month can determine the overall direction in which the economy is moving, there is ample evidence that things are slowing down, especially in the vital area of consumer spending. Consumer spending accounts for as much as 70 percent of U.S. economic activity. A prolonged slowdown, let alone an actual drop in spending, would represent a grave threat to the economy. The ongoing bust of the housing boom and rising prices are already affecting consumer confidence.

The Reuters/University of Michigan Survey of Consumer Sentiment fell to its lowest level in six months in March. The index slid to 88.4 from 91.3 in February, its lowest since September 2006. Spending – again, much of it on credit - has fallen or stagnated in most sectors, including furniture, clothing, and building materials. In February, major chain stores Wal-Mart, J.C. Penney, and the Gap, reported disappointing sales at stores open at least a year, an important measure of sales performance known as “same-store sales”. The Conference Board’s index of leading economic indicators, which points to the direction of the economy over the next three to six months, fell 0.5 percent in February, the biggest fall in a year, after a 0.3 percent drop in January.

After the burst of the Information Technology bubble of the 1990s, many investors, including individuals, shifted to the housing sector.  With historically-low interest rates and double-digit price rises in many markets, investing in a first or even second home seemed a “safe” way to go. Millions of people became home owners for the first time, and millions of others took out second, third, and even fourth mortgages, with the seemingly endless rising value of their homes as collateral. This artificial sense of wealth compelled millions to borrow money like never before, confident that rising house prices would indefinitely give them the economic breathing space they needed to catch up with their growing debts.

As is to be expected under the anarchy of the capitalist market, speculators piled in as well, buying up homes and “flipping” them for a quick profit. Others bought up lots and built new houses without regard to the real possibilities for selling them. This resulted in a classic crisis of capitalist overproduction - there are now “too many” homes available.  Not “too many” to meet the human needs of the homeless and inadequately housed, but “too many” to make a profit within the narrow limits of the capitalist market. In 2005, the housing market began to cool rapidly, and millions of homeowners and many speculators are now faced with a nightmare scenario – owing more on their loans than the homes are actually worth.

One result of this is the “subprime” / adjustable rate mortgage (ARM) crisis, which has already affected at least 10 percent of the housing loans industry. These predatory loans, which start out with a low “teaser” interest rate that then jumps to a much higher rate, has trapped millions of low-income workers in a vice.  In some cases, monthly mortgage payments jumped from $700 to $1,100 or more, literally overnight. This is an impossible increase to cover on the low wages made by most of those who “qualified” for these loans. The crisis caused by the defaults on these loans may well spread to the broader financial services sector. At least 20 mortgage lenders who sold mostly subprime loans have already filed for bankruptcy in recent months. Former Federal Reserve Chairman Alan Greenspan commented that the sub-prime crisis is “not a small issue…You can’t take 10 percent out of mortgage originations without some impact.”

According to the Mortgage Bankers Association, over 500,000 mortgages, were in foreclosure at the end of the fourth quarter 2006, with a total of over 43 million outstanding loans at the end of last year. Credit is being tightened and could take as many as one million potential home owners out of the market. Home repossessions have spiked, as literally millions are faced with foreclosure on their homes. There is the danger of a vicious circle as repossessed homes are put on the market, adding even further to the glut of homes already for sale, putting even more downward pressure on prices. Dean Baker, co-director of the Center for Economic and Policy Research explained that “inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent. Now, with the tightening of credit, I don’t see how prices don’t fall another 5, 6 or 7 percent.”

The New York Times reported that, “The slump in home prices from the end of 2005 to the end of 2006 was the biggest year over year drop since the National Association of Realtors started keeping track in 1982.” Home values fell 0.2 percent in January from a year earlier, according to the S&P/Case-Shiller index, a measure of home prices in 20 U.S. metropolitan areas. The decrease was the first since the group started the index in January 2001. The National Association of Realtors reported in April 2007 that it expects its measure of home prices to fall in 2007 for the first time since it started tracking sales nearly 40 years ago.

A Bloomberg News survey reported that new home sales in the U.S. dropped 3.9 percent to an annual pace of 848,000 in February, despite predictions they would rise to 985,000. A report from the U.S. Census Bureau showed that in January, existing homes for sale were up 23 percent to 3.5 million. That same month, new homes completed and available for sale reached a record high of 175,000, up 47 percent from a year earlier. The Commerce Department announced that construction of new homes in January fell by 14.3 percent. The Census report also showed a record 2.1 million empty homes for sale on the market - a jump of 34 percent from a year earlier. This is nearly double the long-term vacancy rate, and the sixth straight quarter of record vacant homes.

In short, inventories are up, sales are down, profits are lower. Despite the inevitable fluctuations from month to month, many factors point to a steady downturn or at least stagnation for the housing industry in the coming period – a bleak outlook for the sector that buoyed the economy after the bust of the Information Technology bubble. Some analysts think that if inflation is taken into account, it may take five to seven years for prices nationally to reach the peaks hit in 2005. Others think prices may never recover their recent highs when adjusted for inflation.

The knock-on effect of the housing bust will almost certainly be felt throughout the broader U.S. economy and could even spread internationally.  The main victims of the sub-prime mortgage crisis are also those most likely to shop at large discount stores like Wal-Mart and Target, whose sales may be affected as a result. All told, it is estimated that as many as 1.5 million Americans may lose their homes, and another 100,000 people in housing-related industries could lose their jobs. For millions, the “American Dream” of home ownership has turned into a nightmare. As always, it is the working class that must pay for the greed of the speculators and bankers.

Analysts estimate the economy needs to generate between 110,000 and 150,000 jobs each month just to absorb new entrants to the labor market. Job creation has averaged 166,000 per month over the last 12 months, just barely enough to keep up. Most of these are low-wage, non-union jobs in the services industry, which now accounts for 80 percent of the economy. In terms of quantity and quality, these jobs in no way make up for the 3.2 million - one in six factory jobs - that have disappeared since the start of 2000, and which continue to be cut.   Despite this, the unemployment rate, taken from a separate survey of households, fell to 4.5 percent of the active population in March. But this figure is misleading, as millions who have been unable to find work are no longer counted as part of the “active” population.  

Just 113,000 jobs were added in February, reflecting continued weakness in the housing and auto sectors.  There was a 62,000 drop in construction jobs, the sector’s sharpest decline since 1991. The only “good news” were the 168,000 jobs added in the service sector, and 39,000 added by the government. This reflects the shift from manufacturing and construction to services and the state. Ironically the “small government” Republicans have presided over greatest expansion of the state in history, mostly related to “Homeland Security”.

The overall picture is one of fragility. The ongoing decline of American industry was reflected in January’s plunge 9.3 percent plunge of durable goods orders, the worst dropoff in demand in almost seven years. Durable goods includes big-ticket manufactured goods, including cars, aircraft and washing machines. This weakness means more jobs will be on the chopping block.

Extracting maximum profit from as few workers as possible is the key to “success” under capitalism. Despite meager growth in employment, corporate profits have soared in the past year. 2006 was another bonanza year for corporate profits and the stock market, with the stocks of the S&P 500 gaining of 16 percent. But historically, record profits usually come toward the end of the economic cycle. There are many other indications that the cycle of expansion may be nearing its end. When average earnings over a ten-year period are figured in, stocks on the S&P 500 are highly overvalued even in capitalist terms, with an adjusted price-earnings ratio of 25 to 1, well above the historical average of 14 or 15 to 1. Profits currently stand at 12 percent of GDP, the highest level since the 1960s and 33 percent above the historical average of 9 percent. That makes it extremely unlikely that profits can keep growing at this pace. Researchers have found that over the long-term, profits for publicly-traded companies grow at less than 2 percent a year on average, adjusted for inflation. This would indicate that profit growth will most likely decline, possibly sharply at some point in the coming period. Lower profits leads to even lower investment, which means even fewer jobs are created.

There are also limits to how much can be squeezed from workers in both relative and absolute terms. The Labor Department reported that non-farm business productivity slowed to a 1.6 percent annualized pace in the fourth quarter from the 3.0 percent previously reported. This trimmed productivity gains for 2006 as a whole to 1.6 percent, the weakest rise since a matching pace set in 1997. Unit labor costs, a gauge of inflation and profit pressure watched closely by the Federal Reserve, went up by a hefty 6.6 percent annualized rate in the fourth quarter of 2006. For the year as a whole, unit labor costs rose 3.2 percent, the largest gain since 2000. Investment in productive capacity is down, as many investors have doubts about profitability. Non-defense capital goods spending excluding aircraft, seen as a good proxy for business investment, fell 6.3 percent in January, the deepest decline in three years. Factory orders fell 5.6 percent. All of this means that workers are producing surplus value less efficiently and costing employers more – another recipe for job cuts and stagnation in hiring.

There is a growing lack of confidence in economy, with wild ups and downs on world stock markets. In late February, concerns that the Chinese economy is “overheating” (i.e. the danger of a crisis of overproduction), caused the Shanghai stock market to plunge nearly 9 percent in a single day. The panic spread to the U.S., and the Dow Jones dropped 416 points that same day - the biggest one-day point drop since the day the market reopened after the Sept. 11 attacks. A mid-April poll by the Los Angeles Times and Bloomberg showed 60 percent of those surveyed believe a recession is somewhat or very likely in the next year, with more than a third saying their own finances are shaky.

Despite all of this, the onset of an economic downturn may well be delayed for the time being – it is in the interest of the world economy as a whole to continue to prop up the U.S. for as long as possible. What is most important, however, is not the precise moment at which the economy enters a slump at a certain stage, but the effect the constant instability of life under capitalism has on workers’ consciousness. This “boom” was made possible by the extreme exploitation of working people, who have been willing to work longer and harder for less in an attempt to solve their problems.  Workers have in many ways adopted a “wait and see” approach, hoping things will turn around. When at a certain stage the anemic economic expansion inevitably turns into its opposite, the realization that this is as good as it gets under capitalism will continue to sink in, further transforming the consciousness of millions.

Most people do not learn about the realities of the class struggle from books.  They learn from the school of hard knocks – and the system is preparing many hard knocks for the working class. Boom or slump, capitalism can offer the working class nothing but poverty, exploitation, and degradation, even in the richest country on earth.  It is the richest country on earth precisely because the wealth created by the many is concentrated in the hands of a few, a process that has accelerated in the last few years, leading to an ever-wider gap between the rich and poor.

According to the Luxembourg Income Study, over the last two decades, the U.S. has had the highest or near-highest rates of poverty for children, individual adults and families among 31 developed countries. The study found that of those 31 countries, with the exception of Mexico and Russia, the U.S. devotes the smallest portion of its GDP to federal anti-poverty programs, and those programs are among the least effective at reducing poverty.

A recent analysis of the 2005 census figures made by McClatchy Newspapers found that the percentage of Americans living in severe poverty has reached a 32-year high. Forty-three percent (16 million) of the nation’s 37 million poor are living in deep poverty - the highest rate since at least 1975. The report found that severe poverty is worst near the Mexican border and in parts of the South, where 6.5 million severely poor residents are struggling to find work as manufacturing jobs in the textile, apparel and furniture-making industries disappear. The Midwest “Rust Belt” and areas of the Northeast also have been hit hard as economic restructuring and foreign competition have forced numerous plant closings. These figures do not include the millions of immigrants living in poverty in the shadows of U.S. society. If they were factored in, the numbers would be far higher.

While the number of poor Americans has grown steadily for 30 years, the pace has accelerated.  From 2000 to 2005, the number of severely poor Americans grew by 26 percent, which is 56 percent faster than the overall poor population grew over the same period. The McClatchy report describes a “permanent underclass” with no social “safety net” to catch it. The social programs working Americans fought so hard for in the past have been largely dismantled by Reagan-Bush-Clinton-Bush. 2003, the latest year for which complete data is available, the Census Bureau’s Survey of Income and Program Participation found that any given month, only 10 percent of severely poor Americans received Temporary Assistance for Needy Families available, and that only 36 percent received food stamps. The rest are left to fend for themselves.

According to the report, nearly two out of three people (10.3 million) in severe poverty are white, but blacks (4.3 million) and Hispanics of any race (3.7 million) make up disproportionate shares. Blacks are nearly three times as likely as non-Hispanic whites to be in deep poverty, while Hispanics are roughly twice as likely. About one in three severely poor people are under age 17, and nearly two out of three are female. This was the trend not only in large urban counties but in suburban and rural areas as well.

When adjusted for inflation, the median household income of working class families has fallen for five straight years. The reason for this is clear: over the same period, the share of national income going to corporate profits has dwarfed the amount going toward workers’ wages.

The obscene level to which corporate profiteering has reached can be seen in the case of Ford Motor Company, part of the beleaguered auto industry. The company posted a record $12.7 billion loss in 2006, and is therefore “restructuring” – i.e. laying off tens of thousands of union workers. And yet, it saw fit to pay new CEO Alan Mulally $28 million in salary, bonuses, personal expenses, and stock options for just four months on the job. That’s nearly a quarter of a million dollars a day. This is his reward for laying off over 30,000 mostly unionized Ford workers, and to strengthen his resolve when wrenching concessions from the United Auto Workers in upcoming contract negotiations. By contrast, full-time union members – many of whose jobs are on the line - were given “bonuses” of around $500 each in order to “improve morale in the middle of a downsizing.”

While corporate profits explode and CEO payouts reach grotesque new levels, working people are caught in an economic vice as wages stagnate or barely keep pace with inflation, while health care, education, and housing costs soar.  While the crisis of U.S. capitalism affects all American workers, organized labor in particular is faced with an all-out offensive by the bosses.