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AB 2000 studies

Alain Boublil Blog


The American economy : miracle or mirage ?

The publication of the first estimation of the American GDP for the 1st 2019 quarter has given the opportunity to enthusiastic comments as the last unemployment figures, the best for 49 years. With a 0.8% growth, i.e. an annual rhythm above 3%, the American economy has invalidated the analysis which were forecasting for that period 0.5%, due, partly, to the shutdown. The stoppage of the country administrative activity, provoked by the disagreement between the White House and the Congress about the increase of the public debt limit had generated the put in lays-off of a part of the administration. It should have weighted on the economy. That did not occur. Unemployment rate has fallen from 3.8% to 3.6% in April which is quite revealing about the apparent good health of the American economy. At the worst time of the 2009 recession, it had reached 10%.

The growth cycle is going on for ten years, which is exceptionally long. So, most of the economists were forecasting its approaching end and the coming of the country into recession. They had been understood by financial markets which fell at the end of last year. The trend had been amplified by the prospect of a trade war with China. The American administration then rectified its position and an agreement seemed to be imminent until the last aggressive declarations of Donald Trump during this weekend which has immediately generated a strong markets fall in Asia and in Europe. A year and half before the election, it is not sure that the American president will take the risk of a crash provoked by the failure of the current negotiations. Before, Wall Street had recovered its record highs reached in 2018 during autumn. Nasdaq, which includes companies having a market capitalization without any connection with their profit capacities, which would have worried, has also reached historical highs at the end of last week. But these rises are coming more from tax measures adopted by the Trump administration than from an improvement of the operational achievements of the enterprises. So, they are, for a part, artificial.

American growth has been stimulated for ten years by the put in production of shale oil and gas fields. The U.S. became again one of the top oil producers in the world and has started to export oil and even natural gas. This trend is durable, since these new extraction techniques are efficient and competitive.The fight between Occidental Petroleum, supported by Warren Buffet, and Chevron to take the control of Anadarko is testifying of that, with the bid of the first one reaching 38 billion dollars. Despite the fall of oil imports, the American trade deficit in 2018 has reached a record high with 620 billion dollars. That shows that the followed policy has not yet delivered the expected results. American companies have not re-localized their foreign activities and citizens have not put into practice the America First keynote of their president in their consumption modes.

Regarding the employment situation, which is of course much better than in most of European countries, it carries a double bias. There is, as in Europe, a high level of precarious jobs or part-time ones. But it is not new. In return, activity rate is still inferior to its past levels, which put into perspective the good figures of the unemployment. Many Americans, after the recession occurred in 2008-2009, did not come back to the job market. The existence of a vast numbers of workers which are still available explains well why there is not yet a real tension on wages, even if these ones have just risen by 3.5%. But that is far from having erased purchasing power losses observed for ten years. Minimum wage level is unchanged around 7.30$, i.e. 6.50€. So inflation staid very moderate (1.6% during last 12 months) and the Federal Reserve has renounced to new interest rates increases since the beginning of the year.

When we closely analyze 1st quarter figures, we notice that growth at first results from a strong inventories increase. Enterprises, worried about a possible failure of the discussion with Beijing, have taken a maximum of precautions in case of a massive increase of customs duties. But inventories, sooner or later, will decrease and growth has a very low probability to stay on such a rhythm. The continuation of the current growth cycle is also resulting from the budgetary policy of the Trump administration. Massive tax cuts have aggravated the deficit which has reached 4.5% of GDP in 2018 and it should increase again in 2019. Total public indebtedness is exceeding 100% of GDP and it is by large financed by foreigners due to the insufficiency of American household savings. Do we have, due to this situation, to make a parallel with the 2007 sub-prime crisis, which was a private debt crisis which put in danger the global banking system and generated the crisis we remember? No, because the situation is different. Today, it is the American public debt which is in question but creditors are mainly States through their central banks with, in first place, Japan and China. They have no interest in destabilizing their main debtor because they would be the first victims.

The American monetary policy is going to play a major role in the coming months. Traditionally, to make up the external deficit, countries used to devalue their currency along with the adoption of restrictive monetary policies. But, due to the internationalization of financial markets and the huge amounts of available liquidities, any interest rate increase generates a rise of the involved country currency which is in contradiction with the objective of the reduction of the external deficit. After the increases decided during 2018, the dollar has recovered its highest level for two years. The Federal Reserve is confronted to a delicate dilemma: if it increases again its rates to make a soft landing of the American economy easier and to avoid a sharp recession, it makes more costly the financing of the public debt and it generates an increase of the dollar value, which hurts exports. It contributes to the aggravation of the twin deficits, internal and external. It is these consequences which have aroused White House critics about past increases. But if it renounces to any restrictive action, the American central bank takes another risk, to encourage the creation of a speculative bubble on financial markets. Its blowing out would have heavy consequences on the real economy, without providing any remedy to the current unbalances. So, the U.S. is looking for the tools which would allow them to have the best management of the imbalances the country is confronted with.

The apparent good health of the American economy is misleading because it goes along with a high public indebtedness which has not, as a counterpart the creation of real wealth like the building of infrastructures for instance. The tax cuts have mainly profited to enterprises which have transferred them to their shareholders through dividends or share buybacks. These evolutions go along with a worrying foreign indebtedness. It is for this reason that what some are qualifying a miracle contains a large part of mirage.           


  1. Hugo 05/17/2019 3 p.m. #

    Je suis toujours surpris de voir que votre blog est si peu commenté. Merci pour votre analyse une fois de plus très claire et concise.

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