In U.S., Slow Growth, Excess Inventory
and Mounting Debt
by Seth Sandronsky
June 7, 2003
Three processes are underway in the U.S. economy as it slows down.
The first is weak economic growth. The nation's gross domestic product—the final value in current prices of all goods and services produced within the U.S.—slowed for first-quarter 2003 versus fourth-quarter 2002.
At the recent Group of Eight summit, President Bush said that U.S. growth would rebound later this year. Subsequently, Federal Reserve Chairman Alan Greenspan hinted that central bank officials may further cut the short-term interest rate to promote growth when they meet on June 24-25.
The Chairman wants to avoid deflation, a general fall in prices that would cut profits and curtail job creation. Bush and the Chairman are publicly claiming that May's $350 billion tax cut will stimulate the U.S. economy to recover from its current sluggishness.
On that note, the nation's economy has shed over 3.1 million private-sector jobs since February 2001, according to Labor Department data. The official May jobless rate rose to 6.1 percent from 6.0 percent in April.
On one hand, there are now nine million people officially out of work. On the other and related hand, the U.S. economy is suffering from excess inventory.
The dollar value of U.S. inventories grew during the last quarter of 2002 and the first quarter of this year, according to Commerce Department data.
Companies' inventories grew at a slower rate during the January-March 2003 quarter, as they slowed production to try and balance inventories and sales, which further slowed growth.
Against that backdrop, U.S. carmakers have been using zero-percent financing and rebates to sell new vehicles and reduce their inventories. Has this helped or harmed them?
"The Big Three are sitting on big inventories of unsold cars," the June 1 Wall St. Journal reported. "Ford had 70 days' supply of unsold cars at the end of April. GM had 79 days' worth of cars in stock. DaimlerChrysler's Chrysler Group had a leaner inventory of 48 days' worth of cars.
Traditionally, the Big Three have aimed for 60 to 65 days' supply of stock at dealerships."
Chrysler, the smallest of the Big Three, has the lowest inventory. However, the company has warned that it may lose over $1 billion in the second quarter due partly to its higher new car price cuts and weak sales in the U.S. market.
Chrysler's revenue to debt ratio is worrying Wall Street. This combination has spurred "Standard and Poor's, the credit rating agency, to place the parent company's long term debt outlook on 'negative' from 'stable,' citing what it called the 'staggering' operating loss forecast," the June 4 Financial Times reported.
We turn from private to government debt. Nationwide, state and local government budget deficits are adding to the economic contraction.
Most state and local governments are legally required to balance their budgets. Thus they are cutting spending for or increasing taxes on the majority of working people, both of which slow the economy.
More government indebtedness is headed the way of the American people, thanks to Bush's third tax cut to benefit corporations and the wealthy, while doing little to help state and local governments. Meanwhile, the latter are slashing social welfare spending to balance their budgets and service debt.
Moreover, news media focus on government debt stands in stark contrast to the small coverage of the U.S. deficit on the current account, or private debt. What's wrong with this picture?
"The United States current account deficit, which is driven primarily by the trade deficit, is currently running at an annual rate of more than $550 billion a year," economist Dean Baker noted. "This has approximately the same effect on future living standards as a budget deficit of the same magnitude."
The U.S. current account deficit is larger than the federal and state budget deficits combined. Who cares?
Well, consumers and corporations connected with the deficit on the current account can go bankrupt. If not that option during a slowdown, they can reduce spending to avoid going broke; both options slow the economy.
In the meantime, U.S. consumer debt rose nearly four percent on an annual rate for January-March 2003, to $1.74 trillion, reported the Federal Reserve. This is more volatile than government debt, as Uncle Sam isn’t likely to declare bankruptcy in this century.
Where will the U.S. economy find profitable investments to grow in the current business climate? How can growth resume when it is based on rising consumer and corporate indebtedness?
A look back is useful. With increased government spending to purchase excess private goods, the U.S. economy emerged from the Great Depression.
It was the Second World War that rescued the nation from depression. Then, more war spending was the key to increased business activity and job creation.
And now? It is unclear how the Bush White House's invasion and occupation of Iraq and "war on terrorism" generally will improve the U.S. business outlook or the job market, which fuel growth.
For the short-term, it appears that slow growth, excess inventory and mounting debt will afflict the U.S. economy. A recovery from this sour situation looks to be a long way down the road.
Seth Sandronsky is a member of Sacramento/Yolo Peace Action, and an editor with Because People Matter, Sacramento's progressive newspaper. Email: firstname.lastname@example.org