- Articles by the Marubeni America Corporation Washington D.C. Office General Manager -
Dispatches from the Potomac

- ISSUE 18

Long-term Stagnation and Drastic Change in the U.S. Economy

Takashi Imamura
Washington D.C. Office General Manager, Marubeni America Corporation

It appears that President Obama will be able to complete his term without experiencing a recession. When he took office in January 2009 the country was in the midst of an unprecedented financial crisis; but, the extremely easy monetary policy of the Federal Reserve Bank (FRB) was effective and the economy bottomed out in June that year, and has been expanding for nearly seven and a half years as of this November.

* This article was originally written in October for publication in the November 2016 edition of the Marubeni Group Magazine, M-SPIRIT.

Continuing Long-Term Stagnation of the U.S. Economy

However, the pace of this long economic expansion is very slow. The real economic growth rate over the last seven years is an average of 1.9% annually. In addition, during the preceding economic downturn there was the Lehman financial crisis, and the U.S. economy contracted by at least 4%. So with such minimal growth, neither the financial markets, business, nor voters seem to feel that the economy has improved. In fact, the perception is that the economy has been in a long period of stagnation. This long stagnation had a strong influence on the Republican Party nomination of the real estate mogul Donald Trump, who is not a politician, as their candidate for the presidential election this year, as well as on the struggles with popularity of the Democratic presidential candidate, former Secretary of State Hilary Clinton.

One of the experts who first pointed out this long-term stagnation as a structural problem of the U.S. economy in November 2013 was former Secretary of the Treasury Lawrence Summers, who served as Director of the National Economic Council (NEC) during President Obama’s first term in office. At that time, there were many people who disagreed with his argument that the U.S. economy chronically favors savings over investment, creating insufficient demand, which leads to continuing low economic growth. Three years later, however, the investment stagnation and low economic growth have continued, and the long-term stagnation is a reality. Furthermore, the investment shortfall continues, and the growth of labor productivity in the U.S. economy has declined, so that the potential growth rate has fallen to below 2%.

Some decline in the potential growth rate compared to the past is inevitable, since the population is also gradually aging in the U.S. as well, with the large group in the baby-boomer generation reaching retirement age. During the long-term stagnation, however, even the current working-age population has faced long periods of unemployment, and labor capability is lost as more and more people leave the labor market. In fact, the percentage of the working-age population that has given up seeking employment is higher now than before the financial crisis. The result is that the potential growth rate has fallen more than the amount expected due to the aging of the population.

Continuing Drastic Internal Change

On the other hand, internally, the U.S. economy has been undergoing rapid change, in spite of the slow economy. There are more than a few enterprises that have made breakthroughs during the long-term stagnation, such as Uber and Airbnb. When there is low economic growth, however, if there is an increase in domestic investment along with business innovation, this is often accompanied by a decline in investment and demand by other businesses. Uber, for example, steals demand from the competing taxi companies, and may even reduce the demand for automobiles as the lifestyles of the users change. Airbnb decreases the demand for the accommodation industry, and may suppress investment in the construction of new hotels, since existing residences are being used. Even among the businesses that are actively engaged in domestic investment, many are investing in labor saving and automation in order to maintain and improve competitiveness, which reduces employment. In many cases, there is a shift to employees with higher levels of education and skill. Furthermore, in recent years in the stock market, companies are being strongly pressured to provide a return to shareholders, which forces the companies to allocate funds to buy back stock or to increase dividends instead of investing the money.

This kind of change occurring internally in the U.S. economy is highly likely to counteract the effectiveness of deregulation and stimulus measures for employment and demand that traditionally have been used. There is no point if companies working on technical innovation and cost reductions to survive global competition lose their competitive edge because they are asked to maintain domestic employment. If there is any action to introduce measures to reduce the pressure to deliver returns to stockholders and promote business investment, it will probably be resisted by the stockholders. For the expansion of the labor force, it is important to recover the labor capability of those who have been unemployed for a long time; but, the magnitude of the changes in personnel demanded by business, and the fact that many of the long-term unemployed are older, and have difficultly responding to changes, suggests that it will be very difficult to implement effective retraining.

Although the long standing economic stagnation has affected this year’s presidential election, economic policy was not an important issue in the election campaigns. There are probably good reasons for this. The voters are laborers, consumers and investors, and already are feeling the intense changes. During the campaign, Mr. Trump claimed that 4% growth could be achieved with a large tax reduction and the manufacturing industry returning to the domestic market, while Ms. Clinton made a notable promise to focus on income redistribution, but neither of these seemed to sway the voters.

The current situation in the U.S. economy and presidential election means that 2017 and beyond will continue to be a business environment with many questions and issues for the Marubeni Group and other Japanese companies working in the U.S. The drastic change and the long-term stagnation, as well as the inability of the politicians to institute effective countermeasures are all likely to continue. Nevertheless, compared to Japan, the U.S. is still a very promising market in the world, with a lot of room for demand growth and high profitability. Since that is the situation, we should look for ways to grow and work to be a business that can contribute to overcoming the long-term stagnation in the U.S., to become a company that can react more quickly, and initiate change ourselves.

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