16 - 22 August 2001
Issue No.547
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Al-Ahram Weekly Online 16 - 22 August 2001 Issue No.547 |
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Seven lean years
The American economy is tottering and wreaking havoc in the global economy, writes Faiza Rady
It was good while it lasted: but the seven fat years have at last passed by. The euphoric boom days are gone and done for, as doom and gloom projections of global recession cast their shadows over the economic landscape. Until very recently, the optimists were still stubbornly groping for proverbial straws. The United States economy might be bottoming out but it still enjoys three per cent growth, a most respectable figure by any First World standards, they insisted. And what about consumer confidence, they cried, most eloquently expressed in exuberant over-spending and shopping-spree addiction? "Shop until you drop" is so entrenched in the US that the personal saving rate is estimated at barely over one per cent of disposable income. Until June, and despite grim corporate profit warning bells reverberating all over the place, most American households were still spending like there was no tomorrow. Tomorrow, however, has come with a hard landing and all hell has broken loose.
The optimists have fallen flat on their noses. Rather than stabilising around the three per cent range, the US's Gross Domestic Product (GDP) has slumped to rock bottom -- at least for the time being. But the times might even get harder yet, as the Biblical lean cows gobble up the fat ones. Last year, the American economy grew by only 1.3 per cent, that figure falling to a dismal 0.7 in the last quarter, according to World Bank figures. The optimists were way off the mark, but the doom and gloom theorists -- who had wearily predicted zero growth for the quarter -- came closer to assessing reality. They found an unlikely ally in the US Federal Reserve president and chief guru, Alan Greenspan, who recently let slip that the US economy showed no growth -- full stop. "We are still standing, which is good news as far as I am concerned," declared Greenspan.
While the fat cows fell prey to the lean beasts, corporate profits slithered into a downward spiral. Profits for major multinationals are forecast to drop by more than eight per cent this year, although estimates pointed to a nine per cent rise in January. The lean years by definition impose their own ration of drastic retrenchments and cutbacks.
Like the fated Biblical cycles of successive fat and lean years, the capitalist market moves in inevitable boom and slump cycles. The virtuous boom and the vicious slump are respectively triggered by a rise or fall in labour productivity, either fueling or impeding growth. In the market economy, productivity levels flip-flop -- at times a blessing, at other, less charmed times, a curse.
During the magical period of the boom, productivity levels -- and corporate profits -- rocketed. In the US, the 1995-2000 boom years were propelled by the information technology (IT) "revolution." As IT-driven labour productivity increased, growth levels spiralled -- reaching an annual height of five per cent, a record high for any rich world country. By 2000, unemployment had plummeted to four per cent. More than nine million American workers were employed in the IT sector alone -- exceeding the total number of workers in US car or steel manufacture.
And besides opening a brand new sector in the economy, boasting booming sales and profit margins, the IT "revolution" also undoubtedly triggered growth in manufacturing and services. The application of new technology allowed for an increase in productivity in a shorter period. In addition to its manifold cost-cutting virtues, IT also improved capital allocation and market efficiency. To cite only one example among many: the Swedish steel manufacturer, Sandvik Cormant, slashed an estimated 50 per cent of its order costs by selling 40 per cent of its stocks through the Internet.
A bright new star on the horizon throughout the '90s, the IT sector promised investors the world and more: the illusion of terminating the evil fat-lean cycle. Capital investment soared to dizzying heights as investors scrabbled to grab their own slice of the pie. Racing Bill Gates and other lesser dot.com moguls to reach the IT frontier, new investors stampeded into the field like it was about to be razed. In the US, venture capital (shorthand for capital invested in nascent IT businesses) soared from $3.7 billion to a mind- boggling $45 billion in 1999.
But the problem with the investment stampede was as inevitable as a biblical plague rebuking hubris. Sooner or later, the capitalists' seemingly limitless appetite for investing is undone by the limited nature of the market and consumer buying power. Originally staggering profit rates start falling to normal levels: and then keep on falling. Compared with last year, corporate profits in the US dropped by 17.3 per cent between April and June, reported The Economist.
Slumping profits mark the point of no return. The dream sours as investors leave the IT sector in droves, firms cave in and workers are sacked by the hundreds of thousands. The NASDAQ hi- tech stock market index is down 45 per cent from its March 2000 peak, and more than 900,000 workers have lost their jobs since last year -- a swarm of redundancies not witnessed since the 1950s.
And more is to come: we have not reached rock bottom yet. Among the most damning indicators forecasting the future of any economy is capacity utilisation of existing plants and offices, explains economist Michael Roberts in the British weeklyIn Defense of Marxism. According to May figures, capacity utilisation in the US is down 76 per cent, a telling indicator of drastic retrenchment measures.
"The American colossus is tottering. It will fall and when it does it will take Europe with it," argues Roberts. The signs are already visible. The US has exported its ills to the EU and the developing world, and the list of ailing economies is growing. Over 40 per cent of American capital equipment is imported, and shrinking US demand has already slowed growth worldwide. A faint and evanescent memory, the fat cows are dead and gone. And with no Joseph warning us, we have little defence against the lean years now upon us.
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