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E-mail Xinhua, December 23, 2024
by Xinhua writer Xiong Maoling
WASHINGTON, Dec. 23 (Xinhua) -- Looking back at 2024, the U.S. economy performed relatively well compared to other developed economies. However, a string of underlying structural challenges, shady economic boosters, and incoming policy choices have the world worried for the long run.
BEHIND GROWTH
The U.S. economy grew at an annual rate of 3.1 percent in the third quarter of this year, up from the second quarter's 3 percent and the first quarter's 1.4 percent, the U.S. Department of Commerce reported.
For an overall picture, the International Monetary Fund (IMF) upgraded its U.S. growth forecast to 2.8 percent for the year 2024 in its World Economic Outlook released in October.
Consumer spending, which accounts for some two-thirds of U.S. economic activity, is a main driver of U.S. economic growth, as U.S. consumers have unleashed their pent-up demand for goods and services after the pandemic.
U.S. Bank said in a recent article that a strong job market, low unemployment and wage growth have been crucial in sustaining consumer spending and overall economic growth. However, it cautioned that U.S. credit card debt has surpassed 1 trillion U.S. dollars to a historic high, highlighting potential vulnerability.
Regarding prices, the Labor Department reported that U.S. consumer inflation in November increased 2.7 percent from a year ago. Despite that, the number has dropped significantly from its 9.1-percent peak registered in June 2022, but it still surpasses the Federal Reserve's target of 2 percent over the long run.
Progress in reducing inflation toward the 2-percent target has come to a standstill, as the Labor Department report indicates no signs of improvement in underlying price pressures over the past four months.
Some economists argued that as U.S. inflationary pressures remain persistently high, the Federal Reserve may adopt a more cautious stance on interest rate cuts in the year ahead.
Meanwhile, unemployment has ticked up. The U.S. unemployment rate was up 0.1 percentage point month-on-month in November, and was 0.5 percentage point higher than in November 2023, according to the Bureau of Labor Statistics.
The U.S. Federal Reserve last week slashed interest rates by 25 basis points, the third consecutive rate cut in this easing cycle since September, in an attempt to protect the weakening job market.
EXPLOITING GLOBAL CRISES FOR ECONOMIC GAINS
The United States capitalizes on global crises to boost its economic power. By dominating the arms industry, securing energy deals with Europe, attracting European manufacturers through key legislation, and leveraging financial hegemony, it has managed to siphon wealth from international markets.
It remains the country with the largest presence in the top 100 arms-producing and military services companies, with 41 companies listed, which increased their arms revenues by 2.5 percent to reach 317 billion dollars in 2023, accounting for half of the total top 100 arms revenues, according to the Stockholm International Peace Research Institute.
Besides, Jeffrey Sonnenfeld, a professor of management at Yale University, noted that 90 percent of U.S. aid to Ukraine has stayed in the United States, where leading defense contractors have invested tens of billions in over 100 new industrial manufacturing facilities, creating thousands of jobs across at least 38 states directly, with vital subcomponents sourced from all 50 states.
The ongoing geopolitical turmoil, particularly the Russia-Ukraine conflict, has not only bolstered the U.S. defense industry but also positioned the United States to capitalize on Europe's economic challenges.
As Europe grapples with soaring inflation and rising credit costs, the United States has strategically pushed for a sharp reduction in Europe's energy trade with Russia. The explosion of the Nord Stream gas pipelines has further entangled Europe's energy needs, enabling the United States to step in as a major supplier of liquefied natural gas at prices significantly higher than previous market rates.
In addition to its strategic energy and defense gains, the United States has used key economic legislation to attract European manufacturing to its shores, further weakening Europe's economic strength, particularly that of its industrial powerhouses.
The Inflation Reduction Act and the CHIPS and Science Act are among the policies that incentivize European manufacturers to relocate their operations to the United States. These moves are not only drawing capital and industry away from Europe, but also heightening the risks of deindustrialization, especially in countries that rely heavily on their manufacturing sectors.
Financial hegemony has also played a key role in bolstering the U.S. economy. The dominance of the U.S. dollar in the international monetary system has led global investors seeking safe havens amid geopolitical instability to flock to U.S. financial markets.
The United States accounts for nearly 70 percent of the leading global stock index, up from 30 percent in the 1980s, and the dollar, by some measures, trades at a higher value than at any time since the developed world abandoned fixed exchange rates 50 years ago, said Ruchir Sharma, chair of Rockefeller International, in an article published by the Financial Times.
NEW POLICIES MAY HEIGHTEN RISKS
Analysts warn that some of the incoming administration's policies could expose the economy to significant risks in 2025, including rising inflation and worsening federal debt issues.
One such risk is the large-scale deportation policy promised by U.S. President-elect Donald Trump. An article in Foreign Policy magazine highlights that Trump has vowed to carry out the "largest deportation effort in U.S. history," but the economic cost of such a policy may turn out to be far higher than he anticipates.
Another major risk concerns tariffs. Economists generally agree that broad tariffs on trade partners would lead to higher prices, with the burden falling on U.S. businesses and consumers. This price increase could drive inflation higher, potentially disrupting the Fed's interest rate cuts and causing volatility in financial markets, thereby increasing economic uncertainty.
Furthermore, according to data from the Organisation for Economic Co-operation and Development (OECD), the United States faces the highest level of income inequality among G7 nations, the lowest life expectancy, and the highest housing costs.
Relying on the dollar's global dominance, the U.S. government has developed a dependence on borrowing, funding its economy and society through a "living beyond its means" fiscal policy. This is creating increasingly serious risks for both the U.S. and the global economy. Currently, the U.S. federal debt has surpassed 36 trillion dollars. Trump's proposed tax cuts could exacerbate the debt situation.
Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, told Xinhua that Trump's planned tax cuts would boost the annual fiscal deficit by 800 billion dollars, to reach around 2.4 trillion dollars annually, and raise interest paid on the debt to about 2 trillion dollars annually in 2034.
Although Trump has announced the creation of a new "Department of Government Efficiency" (DOGE) to cut federal spending, the prospects for this initiative are widely questioned. The New York Times reported that significantly cutting the budget and reducing the federal workforce on a large scale is a "daunting task" and would face considerable opposition. Enditem
(Matthew Rusling contributed to the report.)
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