Commentary: Washington is making up its OWN GDP joke

2022-05-13 0 By

US President Joe Biden believes the US economy is overcoming the omicron shock as 467,000 jobs were created in January, far more than expected.”We have come back stronger,” he declared gleefully on February 5th.It’s not the first time Biden has sounded such an optimistic note about the ECONOMY.At the end of January, official data showed that the US economy accelerated in the fourth quarter of 2021, with GDP growth of 6.9% quarter-on-quarter, up from 2.3% in the third quarter and significantly higher than China’s 4.0% year-on-year growth in the fourth quarter.Biden immediately warmed up, claiming it was the first time in 20 years that the U.S. economy had outperformed China’s.Some Western media outlets jumped on the bandwagon.This comparison is clearly not valid.The US GDP grew at an annualized rate of 6.9% in the fourth quarter and 1.7% on a quarterly basis.And that’s compared to the third quarter.China’s 4.0 percent growth in the fourth quarter is compared with the fourth quarter of 2020.The two have completely different diameters, so they can only be compared for the full year of 2021.The US is 5.7% and China 8.1%, so the US is clearly not outperforming China.Moreover, GDP growth in 2021 will come from a different base.Due to the impact of the epidemic, the GDP growth of the US was negative by 3.4% in 2020, while That of China was positive by 2.2%.In 2020 and 2021, the US will grow by 1.1% and China by 5.1%.The US is far behind China.In the fourth quarter of 2021, US GDP also grew by 5.5% year-on-year, while China’s grew by 4.0%.Is the US “outpacing China”?Still not.Because this brief cross-section doesn’t tell the story.In the fourth quarter of 2020, the two economies were at completely different stages.The US economy, hit by the resurgence of the epidemic, is on a severe downward curve, with its GDP in the quarter down 2.3% from the fourth quarter of 2019.China’s economy is on an upward curve, growing 6.5 percent from the fourth quarter of 2019.So this is a mismatch comparison of different bases, not scientific.It is also necessary to compare the two-year average: 1.5% for the United States and 5.2% for China. The United States still lags far behind China.The US GDP growth rate of 5.7% in 2021 is neither higher than that of China, nor that of the UK and France.The UK and France registered GDP growth of 7.2% and 7.0% respectively.But analyses by institutions such as the INTERNATIONAL Monetary Fund suggest that the US economy is outperforming Britain and France because of their different bases for 2020.In 2020, the UK economy will shrink by 9.4%, France by 8.0% and the US by only 3.4%.On a two-year average, the UK and France have not recovered to their pre-pandemic levels, while the US has surpassed them.In this case, why does the comparison between the US and China avoid the two-year average growth rate and only take a selective cross-section of one quarter to mislead public opinion?Biden was also pleased that in 2021, nominal GDP grew by 10.0%, a net gain of $2.1 trillion.But that still doesn’t beat China.Nominal GDP growth of 12.8% in 2021;Factoring in the appreciation of the renminbi against the dollar, nominal GDP rose by a net $3 trillion in dollar terms for the year.The US is still not outpacing China.The comparison of the above four angles proves that the US economy is not outperforming China’s.The self-deceiving “outpacing China” is just a political move by the Biden administration to build momentum in this year’s midterm elections.More importantly, it is necessary to analyze whether such a high GDP growth rate of the United States reflects its economic fundamentals and whether it is sustainable.As mentioned earlier, the difference between its nominal GDP growth rate of 10.0% and real GDP growth rate of 5.7% implies that the PRICE factor of GDP is 4.2%, which is much higher than the 1.3% in 2020 and 1.8% in 2019.As a result, the US will already have significant inflation in 2021.That is partly due to supply-chain disruptions and soaring energy prices, but more to the excesses of the White House and the Federal Reserve.The U.S. consumer price index (CPI) has been rising steadily since surpassing 4 percent in April 2021, and reached 7 percent in December, the highest increase in 40 years.Unprecedented bail-out spending by the Trump and Biden administrations since the outbreak has ballooned the federal debt from $23tn to $30tn.As early as March 2020, the Federal Reserve fired all the bullets at once, cutting the federal benchmark interest rate to zero and freeing up purchases of Treasury bonds and corporate mortgage bonds.You have the Fed buying, the federal government of course issuing debt;And with zero interest rates, interest payments are even lower than before the pandemic.So high growth with high inflation does not reflect the fundamentals of the US economy.Such growth cannot be sustained if it does not reflect economic fundamentals.Analysis of the COMPOSITION of the FOURTH quarter GDP growth in the United States, the economic downturn has begun to emerge.Of the 6.9% quarter-on-quarter GDP growth, 4.9 percentage points came from inventory replenishment.Personal consumption spending, an underlying component of the economy, contributed just 2.25 percent.Commodity consumption contributed 0.13 percentage points;Growth was only 0.5% in the quarter and 8.8% in the third quarter.Private consumption growth was largely driven by consumption of services, which contributed 2.12 percentage points to GDP growth in the fourth quarter, with a large chunk coming from health care, the rebound from the pandemic.Private fixed asset investment, another fundamental to the economy, rose just 1.3% in the fourth quarter, adding just 0.25 percentage points to GDP growth.Together, the two contributed 2.5 percentage points to GDP growth in the fourth quarter.That roughly reflects the underlying momentum of the U.S. economy, which has returned to its trend line of the past decade.Entering 2022, the fiscal and monetary measures that underpinned growth in 2021 are about to be withdrawn.Much of the federal government’s bail-out spending is already due.Rampant inflation has already forced the Fed to shrink its balance sheet and is likely to start raising interest rates in March.Wall Street’s consensus estimate is for five rate hikes in 2022.The tightening of interest rate hikes has led to a broad sell-off in US stocks.As a result, the momentum of US economic growth is likely to slow significantly in the first quarter of 2022.A recent CNBC article argued that the U.S. economy is about to hit a wall.Goldman Sachs recently lowered its GDP growth forecast for the FIRST quarter of 2022 to 0.5% from 2.0% and for the full year to 3.2% from 3.8%, significantly lower than the 4.0% forecast by the International Monetary Fund (IMF) on January 25.What Washington needs to be most concerned about right now is not making up self-aggrandizement jokes, but responding to and defeating the omicron mutant to ensure a steady decline in inflation and steady economic growth.The midterm elections are nine months away.If the economy is still depressed by then, it will be too late for jokes.(The writer is a senior researcher at the Chongyang Institute for Financial Studies, Renmin University of China)