Amidst the anticipation and excitement of the Democratic convention in Denver, and the Republican convention in Minnesota, a big piece of economic news from the US has gone largely unnoticed. The US Commerce department released official figures for growth in the second quarter (April-June)?at 3.3 % it has exceeded the most optimistic forecast of 1.9%, exceeded the performance of any G-7 economy, and at least temporarily staved off fears of a recession. The US economy has now, after negative growth in the last quarter of 2007, seen two consecutive quarters of positive growth?note that the first quarter growth rate was just 0.9% which makes the second quarter performance a significant improvement. In fact, for a developed country, a growth rate of over 3% is somewhat similar in its economic impact to say a 9% rate in a developing country like India given the much higher base at which the US economy calculates its growth from. Not surprisingly, markets in the US and abroad, reacted very positively to this piece of good economic news after a long time. If recession is defined as two consecutive quarters of declining economic growth, then the US, on the evidence of these numbers, seems set to avoid a repeat of the recessions of the early 1980s (after the oil price shock), early 1990s (gulf war, high oil prices and slowdown in trade) and 2001 (the dotcom bust, followed by the political turmoil of 9/11). Still, it is perhaps too early to predict a more permanent turnaround in the US economy. A look at the sources of growth for the second quarter sheds significant light on this more cautious assessment.

The main drivers of growth during the April-June period were exports and consumption demand. US exports grew by 13.2% in this period, powered by a weak dollar. At the same time import demand fell by more than 7%, giving a double boost to the domestic economy. The decline in US imports is, of course, bad news for the rest of the world particularly developing countries which still depend heavily on the US market. Also, the growth in exports may not sustain through the the rest of the year because the dollar has recovered, especially against the Euro, in the third quarter which would nullify some of the temporary advantage to US exporters. Add to this, continued stagnation in America?s major export markets in Europe and Japan and the prospects of continued sharp export growth seems slim.

Apart from exports, the main driver of the 3.3% growth was a spurt in consumer demand, which grew by 1.7% in the quarter?higher than pervious quarters but low when compared with longer term historical trends. Most of this growth would have been propelled by tax rebates, amounting to an estimated $100 billion, handed out by the US government to consumers in the second quarter. Again, the sustainability of this spike is questionable. The tax rebates were a one-off exercise and the same effects are therefore unlikely to be seen in the third and fourth quarter of 2008. One would assume though that one piece of fundamentally good news in the steady decline in oil prices?they are now hovering at around $106 per barrel compared with almost $150 a barrel just a couple of months ago. An extreme rise in oil prices is usually followed by a shock to most economies?perhaps the sharp correction this time around will mean that it will have less of a damaging impact. On the other hand, there is an argument that the rapid decline in oil prices may prevent the necessary correction in demand, which is required to bring prices down to a lower, double digit equilibrium. There was significant evidence of American?s cutting down on the use of gas-guzzling vehicles particularly SUVs and pick-ups. A $40 per barrel decline in the price of oil may cause a rethink which will be bad for the US and world economy in the medium term.

Away from the mixed results analysed so far, there are some indicators which seem to suggest that the spurt in growth is an aberration and the US economy is actually in recession. Unemployment at 5.7% is still the highest in 4 years and the number of jobless is showing no signs of declining?evidence of a recession according to some economists. Also, residential investment, an indicator of the weak housing market, which triggered the downturn in the first place showed a negative growth of more than 15% in the second quarter. It is better than the 25% decline in the first quarter which gives reason for some optimism over the medium term. For now, housing is in deep recession. Corporate profits continue to sag, and the banking system continues to limp?banks are reluctant to give loans despite the low interest rate regime being pushed by the Fed, thus exacerbating the credit crunch.

Overall then, the second quarter growth rate is probably a temporary blip due to special circumstances (weak dollar, tax rebates) and is unlikely to repeat in the next two quarters of 2008. Still, actual growth has beaten all expectations this time around?for the sake of the global economy (the US has a 20% or so share in it) one would have to hope that this continues and that there is a more permanent pick up in US economic performance.

dhiraj.nayyar@expressindia.com