US Economic Mirage
Why Americans Do Not See a Strong Economy
By Daniel Lacalle
The euphoria with the fourth quarter Gross Domestic Product (GDP) figure makes no sense. The headline champions say that real GDP increased at an annual rate of 3.3% in the fourth quarter of 2023, according to the Bureau of Economic Statistics (BES). An increase in real GDP of $1.5 trillion with an increase in public debt of more than $2 trillion is not a strong economy. It is a bloated economy. Furthermore, there is nothing positive in consumption when personal saving as a percentage of disposable personal income was only 3.7% in December and disposable personal income in 2017 has basically stagnated. American consumers are buying fewer things with their salary.
We cannot forget that one of the biggest drivers of the fourth quarter increase in real GDP was an abrupt reduction in the GDP deflator, which came at 1.5%, less than half the previous reading of 3.3%. This is a massive boost to real GDP from a reduction in the inflation estimate that most Americans have not seen at all.
Credit card debt is at an all-time high, and Americans are taking longer to pay their balances. The percentage of Americans who are in financial distress due to credit card debt has reached the same level as during the Great Recession, according to the Federal Reserve Bank of St. Louis report “Share of Americans in Financial Distress Reaches High Levels” (December 26, 2023, J. M. Sanchez, M. Mori).
The evidence of real economy stagnation is also clear in the Gross Domestic Income figure, which shows why U.S. citizens see the economy in recession when official real GDP tells us a different picture. The annual growth of real gross domestic income, with the latest figure, stands at -0.1%. The BES will not publish the fourth quarter until the next GDP revision, but if previous trends continue, the real GDI may continue to signal recession.
The same happens with inflation.
Market participants and the government may consider that the data on PCE inflation is hugely positive, but if we look at non-replaceable services, shelter in particular, these are rising above 5%.
The above-mentioned figures may seem like a dream to any eurozone citizen, where real GDP is in recession even with the massive Next Generation EU fund and all fiscal rules eliminated. However, U.S. citizens must understand that the path of its economy only leads to stagnation. If you follow European policies, you get European stagnation and elevated unemployment.
The lesson is that so-called “public stimulus” always means more debt, which in turn means more taxes, lower growth, weaker real wages for families, as well as a tougher environment for small businesses.
It is no surprise to read that six out of ten people polled by CBS News said they rated the economy as “fairly bad” or “very bad.” U.S. economic policy is increasingly detached from small businesses and families, those who feel the negative effects of inflation and subsequent rate cuts. While the size of government in the economy rises, aggregate figures seem further away from the reality that Americans live in. In Europe, it is the same: governments cheer aggregate GDP and annual inflation changes, while the average citizen sees the purchasing power of salaries decline rapidly and the ability to make ends meet more complicated. Small businesses feel the destruction of margins when inflation soars and suffer twice as much when rates rise because the entire burden of monetary policy expansion and contraction is imposed on the shoulders of the average worker and small entrepreneur.
It is important to remember that this dire situation for the majority comes after an unprecedented chain of monetary and fiscal stimulus plans imposed under the message of redistribution and helping the middle class, when reality shows that financial repression, massive government size, and bloated debt are destroying the middle class while aggregate figures tell them they should be grateful. Policies that have never worked are being implemented at an astonishing pace and with enormous levels of money printing and debt, and the government blames anyone except themselves for poor consumer and business confidence. This is not a strong economy. Deficits and massive debt will mean more taxes, fewer opportunities, weaker real wages, and weaker growth in the future. I come from the euro area, and I know it. I come from the future of America if it continues down this path: stagnation and elevated unemployment.
Read more here.
US ignores China’s role in global trade
By China Daily
Trade: There is still room for cooperation, expert says
China strongly opposes the United States' misrepresentation of its lawful trade activities as "economic coercion", and emphasises that the country stands firmly against US unilateralism and bullying behaviour, the Ministry of Commerce said on Monday.
Last week, the Office of the US Trade Representative released a report on China's World Trade Organization compliance, claiming that "China remains the biggest challenge to the international trading system established by the WTO", which disregarded China's efforts in fulfilling the commitments that the country made during its accession to the intergovernmental organisation.
The head of the ministry's department of WTO affairs said that China has noted the unfounded accusations in the report, according to a ministry statement.
The US has disregarded China's significant achievements in fulfilling its WTO commitments, the official said.
The US has not only distorted China's accomplishments in building a market economy and advancing reform and opening-up, but also failed to acknowledge the country's important contributions to the multilateral trading system and global economic growth since its accession to the WTO in December 2001, the official said.
The US has been making baseless and arbitrary accusations about China's trade and economic policies, showcasing its unilateralism and bullying behaviour, the official added.
Tu Xinquan, head of the China Institute for WTO Studies at the University of International Business and Economics in Beijing, said that China's accession to the WTO has allowed it to leverage its strengths as well as engage in and contribute to the global value chain. This has generated products and employment opportunities worldwide while offering high-quality goods and services at reasonable prices, Tu said.
Since joining the WTO, China, as its largest developing member state, has consistently supported the multilateral trading system, practiced true multilateralism and fulfilled its WTO commitments, according to the Commerce Ministry statement. Furthermore, it said, the country has continuously improved its market economy institutions and legal framework based on its national conditions, expanded high-level institutional opening-up, and deeply participated in the reform of the WTO.
China has also actively helped other developing members, especially least-developed nations, integrate with the multilateral trading system, according to the statement.
Meanwhile, Yu Zhen, director of Wuhan University's Institute for the US and Canadian Economies in Hubei province, said that despite key differences between China and the US on WTO reform, there is still space for cooperation. Both countries should explore avenues to maximize their shared interests and collaborate to address the issues within the WTO's trade dispute settlement system, Yu said.
The deadlock in the WTO's dispute settlement system continues. The US proposes that the process should default to adjudication by panels, while China and the European Union advocate a two-stage arbitration procedure using the Multi-Party Interim Appeal Arbitration Arrangement.
Yin Zheng, executive vice-president of China and East Asia operations for Schneider Electric, a French industrial conglomerate, said that global companies have benefited tangibly from China's membership in the WTO, and his company will continue to invest in innovation activities in the country.
Ni Yueju, a research fellow at the Chinese Academy of Social Sciences' Institute of World Economics and Politics, said that 20 years ago, multinational companies primarily sought to manufacture in China, while the country is now viewed as a critical end market, requiring companies to make significant changes in their strategies.
Minister of Commerce Wang Wentao met on Monday with US Trade Representative Katherine Tai on the sidelines of the 13th Ministerial Conference of the WTO in Abu Dhabi, the United Arab Emirates.
Both sides engaged in in-depth discussions on achieving practical outcomes during the conference, which runs from Monday to Thursday, as well as various economic and trade issues of mutual concern.
Wang also expressed China's serious concerns over US tariffs on Chinese goods and trade-related issues concerning Taiwan.
Read more here.
