U.S. Economy Is In Recovery

Popular Economics Weekly

I mentioned last week that the U.S. economy is now growing faster than the rest of the developed world. How can that be, you say, with all the election propaganda saying the recovery has been a failure?  Here’s why.  The IMF has now chimed in to the chorus of voices that says the U.S. is the first to repair the destruction wrought by the Great Recession. 

The International Monetary Fund’s latest World Economic Outlook projects that the United States will be the strongest of the world’s rich economies. U.S. growth is forecast to average 3 percent, much stronger than that of Germany or France (1.2 percent) or even Canada (2.3 percent).

“Increasingly, the evidence suggests that the United States has come out of the financial crisis of 2008 in better shape than its peers — because of the actions of its government,” says Fareed Zakaria in a Washington Post Oped. “In addition to providing general liquidity, the Fed and the Treasury rescued the financial system but also forced it, through stress tests and new rules, to reform. The result is that U.S. banks are in much better shape than their European counterparts.”

And the Fed announced it will discuss a possible expansion of the size of its third round of bond buying and “better ways to guide markets about future policy actions” at its last FOMC meeting.  This includes setting actual employment targets to reduce the unemployment rate to 6 percent or below.  This is huge, and markets rallied on the announcement because there is no other stimulus spending in the works with austerity in Europe and even China slowing. 

One major issue that hasn’t been discussed is debt deleveraging, and the U.S. is outperforming other developed—and underdeveloped—countries in reducing its debt, contrary to the contentions of politicians who have been repeating their charge that Obama is making the deficit worse, though most of it came from the Great Recession.

Graph: McKinsey and Company

Also, a McKinsey and Company study noted that “Debt in the financial sector relative to GDP has fallen back to levels last seen in 2000, before the credit bubble. U.S. households have reduced their debt relative to disposable income by 15 percentage points, more than in any other country; at this rate, they could reach sustainable debt levels in two years or so.”

Then U.S. corporations have bounced back. Corporate profits are at an all-time high as a percentage of Gross Domestic Product, and companies have $1.7 trillion in cash on their balance sheets. The key to long-term recoveries from recessions is reform and restructuring, and U.S. businesses have responded with government help.

And there is America’s energy revolution, which is also bringing back manufacturing. U.S. exports, which have climbed 45 percent in the past four years, are at their highest level ever as a percentage of GDP.

The facts speak for themselves, in spite of the ‘fiscal cliff’ scares, and most of the euro zone in recession.  The best way to weather any future downturn is to have paid down their debts.  So it looks like the U.S. will once again be the world’s engine of growth that prevents another recession, as I’ve said.

Harlan Green © 2012