We are in the midst of a recession that has been ongoing for more than a year. The recent 400-point drop in the Dow Jones average was a wake-up call. There have been other indicators of a recession, but most economists have ignored or downplayed them. The US has lost two million manufacturing jobs in the last five years and we clearly have excess capacity in our economy.
There are two generally accepted definitions of a recession. Usually, journalists use the easier one: Two consecutive quarters of decline in real GDP. However, the second definition of a recession, according to the Economist magazine, although more difficult to measure, is more accurate: "when an economy is growing at less than its long-term trend rate of growth and has spare capacity." When GM, Ford and Chrysler cut 100,000 jobs last year, and closed or downsized a dozen factories, it is clear that the US economy has excess capacity. There is also clear evidence that the growth rate of the economy has slowed as well.
There are two other indisputable factors that indicate that the US economy is in a recession or worse. First and foremost is the fact that for the first time since 1933 -- the depths of the Great Depression -- the savings rate for the entire economy has been negative. Secondly, our out-of-control trade deficit of $764 billion confirms that we are living above our means. This unprecedented trade deficit is not sustainable.
The federal government reported recently that consumers in 2006 spent all they earned and then some, pushing the personal savings rate into negative territory at minus 0.5%. The savings rate has only been negative for a full year twice before, in 1932 and 1933, when Americans were struggling with huge job layoffs during the Great Depression.
The US trade deficit set a record for the fifth straight year in 2006, reflecting a huge increase in America's foreign oil bill and a record imbalance with China. The year ended with the December deficit increasing more than expected. The Commerce Department reported that the gap between what the US sells abroad and what it imports rose to a record $763.6 billion last year, a 6.5% increase from the previous record of $716.7 billion set in 2005.
The trade report showed that the US deficit with China shot up 15.4% last year, to $232.5 billion, the largest imbalance ever recorded with any country. China surpassed Japan as the country with the largest trade gap with the US in 2000, and has held the top spot since that time.
China reported in March that its surplus with the world increased 67% in January when compared with the comparable month of 2006.
American manufacturers contend China is unfairly manipulating its currency to keep it undervalued against the dollar by as much as 40%, which makes Chinese goods cheaper in the US and American products more expensive in China.
In addition to China, other countries that set record trade gaps with the US last year were Japan, with an imbalance of $88.4 billion, and Mexico, with an imbalance of $64.1 billion. The deficit with Canada, America's largest trading partner, was $72.8 billion, and the deficit with the European Union was $138.5 billion.
Chinese goods are undervalued because its currency, the yuan, has been pegged to the US dollar. In order to reverse our trade imbalance with China we must pressure that emerging superpower to let the yuan be traded freely.
Our lack of a government-sponsored health care system makes us uncompetitive with Europe, Japan and Canada. We must address national health care, not only for the benefit of the nation's health, but for the well-being of the economy.
Finally, the US must make it more difficult for profitable factories to close and be relocated to China, Mexico or elsewhere. At the same time the US should push for an alternative to the Kyoto Treaty to address global warming without disadvantaging businesses in the US.
Joel Joseph is founder and chairman of the Made in the USA Foundation. Email joeldjoseph@gmail.com.
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