Sunday, August 14, 2005

On the US economic "recovery"

"Economic Expansion grows as Unemployment Shrinks", says the NYTimes headline. What are the signs of this growth? Higher retail purchases, especially of cars, reduction in inventory, and lowering unemployment. The author laments that "rising energy prices" is one of the concerns in this "otherwise bright economic picture".

How bright is the economic picture in reality? Let's look at the lowering unemployment. It's true that new jobs are being created - 207,000 new jobs were created in July. But what you don't hear is what the breakdown of these jobs is. Well, 26000 are in the government. Of the remaining 181000, 98% are in the domestic service sector, in categories such as food tenders and bar servers. In other words, hardly any productive activity. Indeed, the US is getting closer and closer to a third-world style service oriented economy. For example, 70% of Wal Mart's goods are manufactured in China.

What about the increased purchasing? A lot of it comes from the real estate boom, which has all signs of being a bubble. That is, people are investing in real estate not because they want an improvement in lifestyle, but because they expect the prices to increase even further if they don't invest now. This can be easily seen in the contrast between house prices and rental prices - house prices are increasing at a much higher pace than rental prices. The low interest rates set by the federal government are responsible for this bubble. What sustains this low interest rate? Huge borrowing from China.

In other words, the US is borrowing money from China not for productive activity, but for lowering interest rates, creating a huge increase in house purchases. In this process, low-end service sector jobs are opening up.

That's some economic recovery!


At 6:42 PM, Blogger Rahul said...

I agree partially. Service sector jobs are not necessarily worse than manufacturing jobs. And more numbers/stats are necessary to prove that jobs being created are necessarily lower in terms of wages than jobs which were previously created. I have read claims to that but havent come across concrete report showing that.

There has been constant job shift in the US over decades. When Japan was strong and growing lots of manufacturing jobs were lost from here but new service sector better paying jobs were created. This time it might not be the same but ..

Regarding US housing bubble, ya it will burst one day and affect lots of people indivially but according to many might not affect US economy as a whole.

At 9:45 PM, Blogger Raghav said...

It's true that service sector jobs are not necessarily worse, but the kind of service sector jobs that are being created are lower end ones (as I've listed).

About the housing bubble, no one really knows. But there are lots of signs it will affect the economy. For one thing, lowering interest rates for housing has always been a kind of backup of the federal government for any kind of recovery. If that itself is under threat, then who knows what will happen. My take: I won't at all be surprised if it's effects are worse than the stock bubble.

At 12:49 PM, Blogger Rahul said...

Need more data to show that service sector jobs being created are all low end.

If you take US vs Europe, the unemployment rates are very high in Europe and also are the unemployment benefits. Both though are captialist socities their approaches are very different in consumerism, social benefits, social (especially medical insurance) schemes, growth rates (which tend to be more in US than Europe) .. Overall the europen model is better though under pressure thay are moving away from it.

At 7:01 PM, Blogger Raghav said...

Well, the data for the low end service jobs is there - I mentioned that 98% jobs created last month are in domestic sector. A good part of it is construction jobs as well.

At 8:18 AM, Blogger Rahul said...

What do you mean by domestic sector?

At 12:45 PM, Blogger Raghav said...

The breakdown (for July 2005) included food servers, bar tenders, transit and ground passenger transportation, retail trade, real estate construction - all services. No production. And pretty low-end services.


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