They think it's all over. The world capitalist economy, led by the US is recovering fast. Indeed, there was no economic recession or downturn at all. Or if there was, it was hardly noticeable. That's the story coming out of the business pages of the newspapers, from the TV pundits on the CNBC business channel and from all the capitalist experts.
From all appearances, things could scarcely be better for the US economy. It has put the recession behind it with so little attendant suffering that most people never even noticed. And now the way is clear for another upswing of growth. So are those few of us who think it's not all over clearly biased Marxists hoping in vain for the "collapse of capitalism", or just plain wrong? It looks as though we are.
As the financial year ending March came to an end as Easter began, the US statisticians revised their estimate of US economic growth for the period from October to December 2001 yet again. Despite the disaster of the terrorist attack on the Twin Towers on 9/11, despite the biggest corporate collapse in American financial history in Enron, despite the war in the Middle East and Afghanistan, the US economy increased in size by 0.4% (or 1.7% on annual basis). And last week, it was announced that in March confidence about the economy among American households took the biggest jump up in ten years. Yes, they think it's all over.
Indeed, throughout the "recession" of last year, consumers continued to spend like there was no tomorrow. "Never before have consumers spent with such abandon during a recession," comments Stephen Roach, chief economist at Morgan Stanley. "In the 28 quarters of the past six recessions, consumer demand rose, on average, at just a 0.5% annual rate. In the 4th quarter of 2001, consumption spending rocketed at a 6% annual rate."
Even the unemployment picture is hardly one to associate with real recession. Factory workers were laid off in respectable numbers, but the number of managerial workers actually grew. Stephen Roach reports that "managerial bloat" increased 2.9% last year. One out of every three employees hired in the last three years is a "manager", increasing the managerial class to 15.3% of the workforce.
At the same time, productivity continued to rise at above 5% a year, when normally it goes down in a recession because workers cannot be cut as fast as sales fall off. But rising productivity is just one of the very peculiar features of what must be not merely the mildest, but the strangest, recession ever. As recessions go, the most recent one is remarkable not for the pain that it inflicted, but for the pain it didn't.
And last month, the final seal of approval for the end of the recession came from the US Federal Reserve Bank Chairman, Alan Greenspan, the guru of the America's capitalist New Economy. But the great man sounded a note of caution about the future. "Although household spending should continue to trend up," said the Fed chairman, "the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles. The recovery in spending on business fixed investment is likely to be only gradual. In particular, its growth will doubtless be less frenetic than in 1999 and early 2000.
So the recovery may be modest. Or, it may not happen at all! And everybody should remember the experiences of previous capitalist recessions since 1945. It's quite common that after an initial contraction in GDP, a recovery follows for a quarter or two before the economy slumps once again. Indeed, in every previous downturn, economists, investors, and especially politicians remained very optimistic. They all continued to forecast an imminent economic recovery in the 1957, 1960, 1969-1970, 1973-1974, and 1980-1982 recessions. But in all these recessions GDP contracted, then expanded after the initial phase of contraction, but again fell thereafter.
And this time, the conditions for recovery are even more absent. In the fourth quarter of last year, profits fell another 8% and profit margins (the difference between the costs of production for each unit and the sale price) are at their lowest levels since the Depression of the 1930s. And that's key. Without profits, there will be no investment and no recovery.
Businesses make profits by selling products and services for more than they cost to produce. An individual business can increase profits by cutting costs. But one business' costs are another's revenue. So cutting costs does nothing for the economy as a whole. The way an economy increases its profits is by selling more or by raising productivity.
Productivity growth is the great hope of Alan Greenspan and bullish economists to create profits. "The synergies of key technologies markedly elevated prospective rates of return on high-tech investment, led to a surge in business capital spending and significantly increased the growth rate of structural productivity," said the Fed chairman last summer, explaining why stock prices were so high.
With Greenspan's remarkable new productivity, one might have expected business profits to soar. Greenspan said they would. Everybody thought they would. And stocks were priced as if they would. Instead, corporate profits have collapsed. Profits were supposed to increase, thanks to the enlightened new management practices of US corporations and the new, productivity-enhancing information technology.
But the influence of these two major changes in the US economy was grossly misjudged. Instead of improving profits, they demolished them. Why? It's because rising productivity did not go into profits but into intense competition. One man's profits became another's losses. Huge investment in new technology was accompanied by no rise in prices. Profits disappeared with inflation. US prices are now hardly rising. In the last three months, the rise has been just 0.1%! The same phenomenon has been repeated across the globe in the major capitalist economies. So corporate profits worldwide have fallen for five quarters in a row, the largest drop in three decades.
And without profits, there will be no investment. Almost the entire recent rise in GDP is from rebuilding stocks. But this is a short-term phenomenon. Unless consumer spending and business capital spending takes off, demand for new production will sag. With consumers already spending as though we were at the top of a boom, and more deeply in debt than ever before, capitalists can hardly expect Americans to do more spending. And capital spending shows no sign of the real level of growth necessary to jump-start the economy.
As mentioned above, management payrolls have actually increased during the "recession". So has corporate borrowing, reaching a record of $4.93 trillion by the end of September 2001. The cost of carrying this debt is a big burden and it is growing. Although wholesale prices (prices at the factory gate) are falling at an annual rate of 2.6%, average real interest rates are over 10%, one of the most painful rates for debt service in our history.
US corporations are building up debt. From 1995-2000 US business net fixed capital investment edged up $321 billion but indebtedness ballooned by $2,472 billion. For each dollar added to net new fixed investment, there were 7.7 dollars added to indebtedness. By this stage of the recession, the corporate sector has normally cleaned up its deficit spending and is well into saving for investment - but not this time around.
So we may go from the recession that never was, to the recovery that never came. They think it's all over, but Kenneth Wolstenholme is no longer here to say: "it is now!"