The state of the American economy at the end of September 2021 is puzzling.
There are signs of a reasonably strong economic recovery, yet parts of the nation are experiencing high rates of infection and high death rates.
GDP growth is robust and unemployment declines slowly. Yet there is an atmosphere of uncertainty that is disturbing.
This article briefly reviews issues and concerns, ending with amazing political behavior.
First we look at the demand for goods and services. There is a lack of demand in the service sector, (restaurants, travel, in-person entertainment, tourism, and transport services.)
This type of expenditure is weakened by the perseverance of the pandemic and reluctance of people to be in close proximity.
The level of such demand is linked to the severity of the Pandemic.
For goods, the story is the opposite: The common view of economists is that the American population has accumulated savings over the past 18 months and is now in the process of spending it.
This has resulted from the large distribution of funds to most of the population and the high unemployment payments to those without jobs.
In addition, wealthier households have seen great increases in the value of their assets—share prices have risen and land values along with housing have increased significantly in market value.
Greater wealth leads to greater consumption.
Supply, on the other hand, is held back by logistics issues with containers poorly distributed among ports, an acute shortage of semiconductor chips required for so many products, particularly automobiles, and labour shortages.
Strong demand, combined with weakened supply, imply that there will be rising levels of inflation as we are now experiencing.
An additional source of inflationary pressure is the lack of rising capacity to produce energy.
This arises from concerns that investment in coal, oil, or gas would have short market longevity in the face of the world wide move to shift to renewable energy.
Normally, when prices go up companies will invest to raise production capacity.
Failure to keep up energy production will certainly have an adverse impact on the economy.
The position of the United States is favorable due to the large increases in recent years in oil and gas production. The European and Asian positions are not so favourable.
The tangle of shifting to renewables from gas and coal promise energy shortages, inflation of energy prices and continued stress during the 30 years this transition requires.
The price of oil topped $80/barrel as this article is written, LNG Asian price is $16/thousand cubic feet, American coal is $180 dollars per metric ton.
These are all very high prices caused by energy shortages leading to strong demands for all fuels. Expected prices averaged over a decade might be Oil $50-60; LNG $10-12; coal $80.
Current prices are more than 50% over these estimated long run prices.
Inflationary pressure
There are different views about this inflationary pressure that is now spreading around the world.
The most important central banks, the Federal Reserve, the Bank of England, the European Central Bank and the central banks of China and Japan have poured liquidity into the banking systems.
This has resulted in very low interest rates but very limited inflation.
Many economists believe that this expansionary monetary policy has created a substantial risk of a higher inflation rate.
Higher inflation would cause the central banks to reduce their liquidity increasing programs and increase interest rates.
However, the key central bankers believe that the current higher inflation rates are a result of supply problems as outlined above and these problems will be reduced within the next 18 months so inflation will not become built into household and business expectations.
It is impossible to know whose view is correct.
The disturbances to the supply side of the economy are not well understood.
There are four key factors that will change the way the economies will operate and the full significance is difficult to determine.
a. The disruption of the logistics routes. This complex phenomena leads to choke points where containers pile up as flow rates have changed. Choke points in the American economy are located at major ports where container ships are waiting to unload. Rail terminals in key locations such as Chicago where there are many fully loaded trains waiting to be unloaded. There are some reports of shortages of truck drivers to move containers from ports and train terminals.
b. Rising prices of energy contribute directly to virtually all costs. The response to shortages is distorted by the transition to renewable energy. How this will work out is unknown.
c. The labour force in the industrialized economies is shifting in its willingness to work at certain jobs and existing wage rates. The implications again are uncertain. The American service sector is desperate for workers at low end jobs.
d. The patterns of world trade seem to be changing leading to supply chains with different flow characteristics. Will the world return to the old patterns of international trade? Will we see production costs rise? The adjustment of such flows will cause supply disruptions.
For the American economy another powerful influence is the impact of the weakening Chinese economy.
The two economies are interconnected and weakness in one is immediately transmitted to the other.
In addition to these considerations there are serious potential disruptions in the American political system. There are two rather technical points that are deeply disturbing.
a. American government expenditures: On October 1, as things stand on September 28, the American Government will have limited authority to spend money. This will be a strong disruptive factor as Government expenditures are an important source of aggregate demand. This failure to pass a budget or to authorize continuing expenditures is not uncommon, but it is disruptive. Eventually it gets corrected. But the chaos and lack of political discipline of the American Congress points to a deeper failure.
b. In the United States there is a limit to the amount of borrowing that can be done by the government. This limit is established by Congress from time to time. Towards the end of October, the US Treasury says it will no longer be able to borrow additional funds. The US government runs a considerable deficit so must increase its borrowing every year to pay for the expenditures that Congress has authorized. Without an increase in borrowing it will not be possible to pay the government’s bills. Some fear that this may result in the US government defaulting on its debt. This is a matter of political grandstanding by the Republican party. It is difficult to believe the level of irresponsibility that the US Congress has reached. In effect these supposed adults are acting like small children over who owns a toy. It is likely that this will be corrected, but it is a sign of poor governance.
The bitter, hateful relationship between the two main political parties; the lies and misrepresentations particularly by Trump and his supporters; the loss of the true patriotic spirit and unwillingness to sacrifice for the country; the greed and eagerness to collect the toys associated with great wealth leave one nauseous and disgusted with the American political system.
As it is beyond imagination that the Congress would allow the Treasury to default on the national debt I put that out of my mind.
Can the politicians again try to overthrow the Government as Trump and the Republicans attempted on January 6?
Remarkably, polling of the general population indicates that there are millions of Americans who believe in radical weird ideas that motivate violent behavior to overthrow the American government.
Failure to maintain government expenditures or destruction of the financial system, both the consequences of the current attitudes of much of the Republican party, are an ominous sign of what the future might bring.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.
