Multinationals propping up U.S. economic growth

May 27, 2011

By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

U.S. multinationals are propping up the nation’s economic growth. While annualized first quarter GDP growth was a sluggish 1.8 percent, much of it inventory buildup, the private sector expanded more strongly, as did returns from overseas investments. With the government now reining in outlays, America’s biggest companies are providing the economic stimulus.

The headline GDP growth figure would have been 1.1 percentage points higher but for a decline in government spending. And gross private sector output grew at an annual pace of 3.6 percent in the quarter, up from a 2.6 percent growth rate for 2010 as a whole, suggesting an acceleration in productive output as the government’s post-crisis efforts at stimulus are withdrawn.

Meanwhile, gross national product grew at a 3.1 percent rate in the quarter. GNP is based on ownership rather than geography and so includes income from U.S. investments abroad, net of payments to foreigners. Net receipts jumped 26 percent from $160 billion to $202 billion at an annual rate. Even in a $15 trillion economy, that’s a sizable contribution to growth from the country’s multinationals, and demonstrates that their profitability and growth can still overcome some of the drag from America’s huge budget and payments deficits.

That’s all despite the fact that the first quarter GDP report was somewhat disquieting when viewed at the consumer level. Final sales to domestic purchasers rose at only a 0.7 percent annual rate, while inventories increased by $52 billion, a potential cause of future weakness if the buildup reverses. The U.S. savings rate also declined further to 5.1 percent, suggesting consumers are still not rebuilding their reserves.

Overall, though, the latest data hint at a healthy shift away from government spending and toward the private sector and the global economy. Logical policy responses include increasing interest rates, thereby providing an incentive for the rebuilding of America’s capital base, and encouraging free trade to the benefit of U.S. multinationals. Another lesson can be found in the private sector’s ability to keep growth going even as government spending shrinks. With luck, policymakers across the spectrum will see the benefit of helping rather than hindering this rebalancing.

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Mr. Hutchinson fails to distinguish between that segment of America that benefits from the success of multinationals and the segment that has been left behind. There is nothing “healthy” about the shift away from government spending while Americans, so many of whom have no jobs and are losing their savings and even their homes, are “still not rebuilding their reserves,” as Mr. Hutchinson puts it, in a phrase that sounds rather like a mild rebuke.

Analysts like Mr. Hutchinson are doing the nation no favor as long as they continue to refuse to asknowledge the existence of, and causes of, the income inequality phenomenon which soon will be threatening our status as the great American Empire. They need to acknowledge that GDP growth no longer serves as a measure of the health of our economy as a whole.

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