The world’s biggest economy

America’s boom has begun. Can it last?

High-frequency economic data suggest it’s full steam ahead

The latest monthly employment report, published on April 2nd, painted an impressive picture: over the previous month America created more than 900,000 jobs. 

That figure, the strongest since August, reflects the state of the economy in the first half of March, when the surveys took place. 

But a look at “high-frequency” economic data for more recent weeks, on everything from daily restaurant diners to Google-search behaviour, suggests that, since then, the recovery has if anything accelerated further. America’s post-lockdown boom has begun.

A rapid bounce-back would be welcome, because the world’s largest economy remains a long way off its pre-pandemic peak, and the damage has been severe. 

Even after the latest jobs numbers, over 8m fewer people are in work than before the pandemic. 

The job losses are concentrated among low-income groups (though it is no longer the case that women are more affected than men). 

One-third of small businesses remain closed. 

Poverty is higher than it was before covid-19 struck, especially among black families. 

And the impact of school closures on children’s education could last for decades.

High-frequency data, largely produced by the private sector, are useful in identifying economic turning-points before they get picked up in the government’s figures, which are slower to arrive. 

In March and April 2020, long before the publication of official numbers, these data showed that the economy was falling off a cliff. 

A year on, happily, they point to a rapidly strengthening economy.

Using mobility data from Google, The Economist has constructed an economic-activity index, which measures people’s visits to workplaces, stations, retail outlets and recreation sites. 

A month ago the index was 30% below its pre-pandemic baseline (see chart 1). 

In recent days the index has jumped to 20% below the baseline.

Other high-frequency data show similar trends. 

The number of passengers travelling through American airports is rising fast. 

Economists have also closely watched statistics from OpenTable, a booking platform. 

In February the number of restaurant diners was 48% lower than normal. 

So far in April it is 18% lower. 

Hotel occupancy is increasing rapidly. 

High-frequency indicators of manufacturing and services activity are surging, too.

People are venturing outside, and mixing, in greater numbers, in part because a successful vaccination campaign has allowed some easing of restrictions. 

And when people do leave the house, they have money to spend. 

On March 17th the Treasury deposited $250bn in stimulus cheques into people’s bank accounts, adding to the $1.5trn of extra personal savings (about 10% of annual consumer spending) that households had piled up by the end of 2020. 

A tracker by JPMorgan Chase, a bank, shows that payment-card spending is near its pre-pandemic level (see chart 2). 

In late March total spending was up by nearly 20% on the previous month, according to Cardify, a data-provider.

The upshot is that America is likely to register jumbo gdp-growth numbers in the second quarter of 2021. 

Research by Nicolas Woloszko of the oecd, a rich-country think-tank, gives a hint of what is to come. 

He uses another type of real-time data, Google-search trends, to construct weekly gdp measurements for the g20 economies. 

In the final week of March American gdp was about 4% below where it would have been in the absence of the pandemic. 

That is the strongest figure in over a year, and far better than most other rich countries.

Many forecasters are now expecting gdp growth of 6% or more in 2021. 

If that happens, then it will not come as a surprise if America notches up monthly jobs gains of 1m or more in future employment reports. 

The unemployment rate could be near its pre-pandemic rate fairly soon.

Yet two factors could spoil the party. 

One relates to economic “scarring”. 

Some economists worry that the pandemic has damaged America’s productive capacity. 

If lots of businesses have gone bankrupt, then even with buoyant demand many Americans will not have jobs to go back to.

So far there is no compelling evidence of a wave of insolvency. 

In 2020 total commercial bankruptcies were about 15% lower than the year before. 

Extensive fiscal support offered by the federal government has helped firms pay their bills, while many landlords have offered rent concessions. 

Bankruptcies have remained low so far in 2021, but no one really knows whether or not they will rise in the coming months, as fiscal support ends and landlords seek to make up for lost time.

The second factor relates to fears that infections could take off again, despite the momentum behind vaccination. 

There are particular concerns about coronavirus variants, such as one first found in Britain, which spread more easily (though the prevalence of the “British variant” has not stopped cases tumbling in Britain itself, where, as in America, vaccination has been proceeding apace). 

Cases of covid-19 in America are now rising again. 

Some places, such as Chicago and New Jersey, have paused reopening.

That is slowing the recovery, but not yet stopping it. 

Widespread vaccination has weakened the link between infection and hospitalisation. 

In Michigan and Florida, two states with high levels of the British variant, the Google-Economist economic-activity index has lost steam in recent days, though it is still stronger than it was in the first quarter of the year. 

There will be setbacks along the way, but expect the good economic news to start piling up.

Why manufacturing matters to economic superpowers

Reshoring makes sense for some industries as competition rises between the US and China

Rana Foroohar 

        © Matt Kenyon

Manufacturing matters. 

While it has become increasingly automated and globalised over the past several decades, it still holds a special place in the national psyche in the US and other big exporting nations, such as Germany, China and Japan.

Part of that is down to its disproportionate benefits to the economy. 

In the US, for example, although manufacturing represents just 11 per cent of gross domestic product and 8 per cent of direct employment, it drives 20 per cent of the country’s capital investment, 30 per cent of productivity growth, 60 per cent of exports and 70 per cent of business R&D, according to figures from the McKinsey Global Institute. 

Manufacturing’s share of the economy in many other developed countries is far higher.

No wonder the debate over where things are made is both emotional and political. 

This debate has come to the forefront in recent years, not only because of US-China tech and trade wars and supply chain shortages in the pandemic, but also because of human rights. 

Western brands including Nike, H&M, and European luxury producers find themselves in an increasingly difficult position for using cotton produced in Xinjiang, some of which may be harvested and spun by forced Uyghur labour.

US and European companies are under tremendous pressure to boycott Xinjiang cotton and use homegrown alternatives. 

Yet when they do, they risk a backlash from the Chinese, who seem to have added the Uyghurs to the list of “no-discussion” areas such as Tibet, Taiwan and Tiananmen. 

I suspect that the side brands take will depend largely on how important China is to their overall revenue and future growth.

But the textile industry has been becoming less globalised for some time now. 

In the US, sectors including textiles and furniture were among those hit hardest by the accession of China to the World Trade Organization, since they are both labour intensive and tradable.

However the calculus has shifted now that wages and domestic demand have risen in China. Well before the Xinjiang concerns, apparel supply chains were shifting. 

Chinese producers exported 71 per cent of finished apparel goods in 2005. By 2018, it was just 29 per cent. 

This change is coming at the same time as other tailwinds for the regionalisation of apparel. 

More brands are going directly to consumers, bypassing expensive bricks and mortar shops. 

This is also increasing investments in software, which will boost efficiency, shorten production cycles, and thus further shift the labour/transport cost/productivity arbitrage in favour of local production.

Whether such reshoring matters for national economies depends very much on the industry. 

A fascinating study by MGI, to be released on April 15, examines 30 main manufacturing sectors in the US. 

It finds that 16 of them stand out for their economic and strategic value, as measured by their contribution to national productivity and economic growth, job and income creation, innovation and national resilience. Apparel is not on the list. 

But semiconductors, medical devices, communications equipment, electronics, autos and auto parts, and precision tools are.

Of course, some of those industries are dividing along national lines, often more for political than economic reasons — witness the US-China chip wars. 

While the US still has the edge in chip design, domestic production capacity has fallen dramatically over the past three decades. 

That is one reason for the shutdowns in the US automotive industry that began in February, when post-pandemic production started to ramp back up. 

That same month, President Joe Biden called for a national review of supply chain vulnerabilities.

His administration has already made it clear that it would like to see more domestic production of semiconductors, medical supplies and other strategically important items. 

But, says MGI chair James Manyika, “size of demand for domestic production matters, especially in industries where there are scale and learning curve effects”, such as semiconductors, which are made far more cheaply in Asia. 

The US could create more demand for domestically fabricated chips, but only if the government underwrote investment via guaranteed federal procurement of supplies, as it did for semiconductors in the 1950s and 1960s.

Given the push towards “buy American” under Biden, as well as the use of the federal balance sheet to support union labour in government contracts and healthcare infrastructure, that’s not inconceivable. 

Indeed, some within the defence community (which needs high-end chips for military equipment) as well as the progressive left (which wants the US to lead on cutting-edge clean tech, which might also create semiconductor demand) would like the US and China to decouple supply chains for chips.

Where would this leave Europe? 

Sitting very uncomfortably between two economic superpowers. 

It does not matter much at a national competitiveness level what fast fashion purveyors and luxury retailers do about Xinjiang, though the moral questions involved may well have brand value implications.

But it does matter what governments do to support domestic demand or control supply chains. 

I suspect that those decisions will start to revolve less around simple cost and efficiency calculations, and more around a broad discussion of national competitiveness.

Biden Must Fix the Future, Not the Past

The US administration's proposed $2 trillion infrastructure package could transform the US and set an important example for other developed countries to follow. But to achieve its potential, the plan must avoid misleading state-versus-market dichotomies and outdated Cold War tropes.

Dani Rodrik

CAMBRIDGE – President Joe Biden’s $2 trillion infrastructure plan is likely to be a watershed moment for the American economy, clearly signaling that the neoliberal era, with its belief that markets work best and are best left alone, is behind us. 

But while neoliberalism may be dead, it is less clear what will replace it.

The challenges that the United States and other advanced economies face today are fundamentally different from those they faced in the early decades of the twentieth century. 

Those earlier challenges gave rise to the New Deal and the welfare state. 

Today’s problems – climate change, the disruption of labor markets due to new technologies, and hyper-globalization – require new solutions. 

We need a new economic vision, not nostalgia for a mythicized age of widely shared prosperity at home and global supremacy abroad.

On climate change, Biden’s plan falls short of the Green New Deal advocated by progressive Democrats such as Representative Alexandria Ocasio-Cortez. 

But it contains significant investments in a green economy, such as supporting markets for electric vehicles and other programs to cut carbon dioxide emissions, making it the largest federal effort ever to curb greenhouse-gases. 

On jobs, the plan aims to expand employment offering good pay and benefits, focusing, in addition to infrastructure, on manufacturing and the growing and essential care economy.

New ways of thinking about the role of government are as important as new priorities. 

Many commentators have framed Biden’s infrastructure plan as a return to big government. 

But the package is spread over eight years, will raise public spending by only one percentage point of GDP, and is projected to pay for itself eventually. 

A boost in public investment in infrastructure, the green transition, and job creation is long overdue. 

Even if the plan were nothing more than a big public investment push financed by taxes on large corporations, it would do a lot of good for the US economy.

But Biden’s plan can be much more. 

It could fundamentally reshape the government’s role in the economy and how that role is perceived. 

Traditional skepticism about government’s economic role is rooted in the belief that private markets, driven by the profit motive, are efficient, while governments are wasteful. 

But the excesses of private markets in recent decades – the rise of monopolies, the follies of private finance, extreme concentration of income, and rising economic insecurity – have taken the shine off the private sector.

At the same time, it is better understood today that in a complex economy characterized by so much uncertainty, top-down regulation is unlikely to work. 

Regardless of the specific domain – promoting green technologies, developing new institutional arrangements for home-care workers, deepening domestic supply chains for high-tech manufacturing, or building on successful workforce development programs – government collaboration with non-governmental actors will be essential.

In all these areas, the government will have to work with markets and private businesses, as well as other stakeholders such as unions and community groups. 

New models of governance will be required to ensure public objectives are pursued with the full participation of those actors who have the knowledge and capacity to achieve them. 

The government will have to become a trusted partner; and it will have to trust other social actors in turn.

In the past, each excessive swing in the state-market balance has eventually prompted an excessive swing in the opposite direction. 

The Biden plan can break this cycle. 

If it succeeds, the example it sets of markets and governments acting as complements, not substitutes – demonstrating that each works better when the other pulls its weight – could be its most important and enduring legacy.

In this regard, it is unhelpful to view the Biden plan as a way to restore America’s competitive position in the world, especially vis-à-vis China. 

Unfortunately, Biden himself is guilty of this framing. 

The package will “put us in a position to win the global competition with China in the upcoming years,” he recently argued.

It may be politically tempting to market the infrastructure plan in this fashion. 

In an earlier era, the prevailing fear that the US was losing its edge to the Soviet Union in ballistic missiles and in the space race helped catalyze a national technological mobilization.

But there is much less reason for fearmongering today. 

It is unlikely to buy much Republican support for the plan, given the intensity of partisan polarization. 

And it diverts attention from the real action: if the plan increases incomes and opportunities for ordinary Americans, as it should, it will have been worth doing, regardless of the effects on America’s geopolitical status.

Moreover, economics is different from an arms race. 

A strong US economy should not be a threat to China, just as Chinese economic growth need not threaten America. 

Biden’s framing is damaging insofar as it turns good economics at home into an instrument of aggressive, zero-sum policies abroad. 

Can we blame China if it tightens restrictions on US corporations as a defensive measure against the Biden plan?

The plan could transform the US and set an important example for other developed countries to follow. 

But to achieve its potential, it must avoid misleading state-versus-market dichotomies and outdated Cold War tropes. 

Only by leaving behind the models of the past can it chart a new vision for the future.

Dani Rodrik, Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy.

India’s Trump Card Against China

Moving into the spotlight is the strategically invaluable Andaman and Nicobar Islands.

By: Phillip Orchard

Despite its enormous potential, India is by no means an inevitable counterweight to Chinese ambitions in the Indian Ocean. 

The country's immense domestic needs and its preoccupation with land-based threats have prevented it from turning its attention fully to the maritime realm. 

And the more China races ahead with its breakneck military expansion, the harder it will be for India to catch up

But it's a mistake to look at Indian and Chinese maritime capabilities as an apples-to-apples comparison. 

India doesn't need to match China destroyer for destroyer or missile for missile because India has some extraordinary geographic advantages in its favor – ones that also happen to make it particularly attractive as a partner with other powers in the region. 

And the strategically invaluable Andaman and Nicobar Islands, India's great trump card in its intensifying competition with China, is moving into the spotlight.

India's Point of View

For a country with more than 4,500 miles (7,200 kilometers) of coastline, India has never been particularly ambitious in the maritime sphere. 

This is, in part, because for much of its history it didn’t have much reason to be. 

Geographically, India is protected by the near-impenetrable Himalayas to its north, harsh subtropical regions to its east and deserts to the west. 

Its long coastline makes it vulnerable to seaborne threats, sure, but few powers have ever been capable of exploiting this vulnerability. 

Buffered by the vast waters of the Arabian Sea, the Bay of Bengal and the open ocean, India is blessed with abundant strategic depth when it comes to naval threats. 

And at any rate, any invading power would confront India’s demographic immensity, which makes direct subjugation by force nearly impossible.

That outside powers have dominated the subcontinent in centuries past is a result mainly of its internal divisions. 

Its primary occupiers – various Muslim dynasties from the 11th century to the 18th century and the Europeans shortly thereafter – succeeded because they managed to turn India against itself, exploiting the competition among different factions and power centers to cultivate coalitions of collaborators who would support their largely commercial objections.

As a result, India has generally focused inward since it became independent. 

Its viability as a modern nation-state has depended on its governments’ ability to manage internal divisions. 

External geopolitics, with the exceptions of the periodic blowups with Pakistan and occasional border clashes with China, took a back seat to more immediate concerns. But the demands of this endeavor are changing, as is India’s broader strategic environment, forcing New Delhi to look increasingly to the far seas.

Its most vital lifelines flow from the west. To fuel growth and development, India’s economic interests have expanded far beyond the subcontinent. 

The country has well over a billion mouths to feed, and sustaining the level of economic growth and modernization necessary to support this population has given India a voracious appetite for commodity imports such as energy. 

In 2019, around 47 percent of the total energy India consumed came from imports, including more than 80 percent of its oil supplies. 

As a result, the country has been quickly expanding its naval presence around critical chokepoints near the Arabian Peninsula and Horn of Africa – waters known to be teeming with pirates, rebels and explosive risks rooted in Middle Eastern rivalries.

Indian interests in eastbound sea lanes are growing too as the country seeks to boost its status as a manufacturing and export power. 

Already, around 40 percent of India’s trade passes through the turbulent waters of the Strait of Malacca, which has plenty of pirates of its own – and, more concerning for India, Chinese ambition. 

As China moves to address its own strategic concerns to the east, secondary issues to its southwest are becoming more important, making India more of a potential threat, however unwittingly, and vice versa. 

China needs to find ways to bypass chokepoints in the East and South China seas, so it needs to build deep-water ports, pipelines and rail lines in India’s backyard. And to prepare for a potential conflict that blocks its maritime chokepoints, it also needs to develop naval forces to keep its backup outlets open and counter enemy forces coming from the west – an effort that will require a network of bases and logistics facilities on India’s periphery to support them.

Thus, India now has good reason to fear both Chinese encirclement and Chinese domination of more distant waters on which India increasingly relies. And this means India now has very good reason to invest considerably more in developing the capabilities to secure trade routes and sustain the regional balance of power with China.

But India has had a hard time shifting resources from its army and air force to the navy. While it’s been touting grand plans for a 200-ship navy by 2027 (up from 130 today) and quietly laying the groundwork for its own “string of pearls” in the Middle East and Southeast Asia, the navy still received just 15 percent of last year’s budget, compared with 23 percent for the air force and 56 percent for the army (the bulk of which goes to pensions). 

The navy’s share of the pie is actually down from 18 percent in 2012. India's struggle to shift focus to the maritime realm might be one motivator behind China's moves in the Himalayas and with Pakistan. 

The more India stays bogged down in conflicts on land, in other words, the less it can shift focus to the sea.

The Metal Chain

China has little reason to fear India as a major threat to its interests in, say, the South China Sea or around Taiwan. But India doesn't need to achieve military parity with China to become a problem. 

It simply needs to leverage its geographic advantages and the growing interest in cooperation from external powers like the U.S. 

This puts the spotlight squarely on the strategic godsend that are India's Andaman and Nicobar Islands.

The archipelago, featuring some 572 islands (just 38 of them inhabited) stretches from just 100 miles north of the northern tip of Indonesia's Sumatra island through the heart of the Andaman Sea toward Myanmar. 

The islands are, in effect, the gateway to the Strait of Malacca. In the view of Chinese defense planners, the more apt metaphor for the islands is a “metal chain.” 

For India, developing the capabilities needed to threaten Chinese access to Malacca from the Indian mainland would be difficult and expensive, requiring rapid leaps forward in its submarine, aircraft carrier, air force and missile programs, as well as in India’s military logistics and surveillance capabilities. 

Threatening Chinese access to Malacca from the Andaman and Nicobars is more straightforward. 

The archipelago is the proverbial “unsinkable aircraft carrier.” 

Indian bases there are ideally placed for conducting surveillance operations, deploying anti-ship missiles and radar stations, stationing supply depots, refueling fighter planes, and so forth.

The islands, moreover, make India immediately attractive as a partner for powers like the U.S that already have the capabilities to maximize their strategic value – something that could allow India to keep China at bay without breaking the bank by trying to match China’s spending on the People's Liberation Army. 

India’s growing ties with Australia are particularly notable in this regard, given how Australia's Cocos Islands could play a similar role in blocking Chinese egress through the Sunda and Lombok straits. 

The Andaman and Nicobars also could facilitate deeper military cooperation with Southeast Asian countries that historically are leery of provoking China without the ability to defend themselves. 

In 2018, India and Indonesia reached a tentative reciprocal access agreement giving India access to a port on the Indonesian island of Sabang, located just southeast of the southernmost Andaman and Nicobar island.

India, though, is still in the early stages of modernizing the military infrastructure enough to maximize their strategic value. 

At present, the islands are home to seven air and naval bases. 

But India began a series of much-needed improvements – for example, lengthening runways to be able to handle fighter jets or long-range reconnaissance aircraft and expanding port infrastructure to handle large warships – only over the past few years. 

India has also been somewhat reluctant to open up the islands to foreign partners. 

Reciprocal access agreements it signed with the U.S., France, Japan and Singapore in recent years, for example, reportedly did not include the Andaman and Nicobars.

But there's been a renewed sense of urgency in New Delhi to tap into the islands’ strategic potential more effectively. 

At the height of the crisis in the Himalayas last summer, there were several calls in Indian media to put the Andaman and Nicobars to work, and India subsequently held naval exercises around the islands to signal to China that aggression in the Himalayas could backfire in ways that could truly hurt China. 

In August, Indian Prime Minister Narendra Modi deemed the islands’ development a strategic priority and announced a new development plan. 

The same month, India announced the completion of a submarine optical fiber connectivity project in the area. 

In October, a U.S. long-range sub hunter became the first U.S. military aircraft to make a refueling pitstop. In December, India test-launched supersonic anti-ship Brahmos missiles from the islands. 

In March, Japan announced a $36 million grant for the development of energy storage systems on South Andaman.

Nothing will happen quickly. India's budgetary problems remain, and the pandemic isn't going to help. 

It's leery of giving China any more reason to try to militarize one of its Belt and Road ports on India's doorstep. 

There's some evidence that Indonesia and, in particular, Malaysia aren't exactly thrilled about the trajectory toward militarization of the Strait of Malacca, and India has an interest in handling Southeast Asian suspicions carefully. 

And India, in general, is still embracing the concept of strategic alignment with outside powers – something it historically has typically eschewed – only slowly.

Even so, on the question of whether and just how much India will emerge as a major player in the burgeoning competition over the Indo-Pacific, the Andaman and Nicobars are the center of gravity. 

Watch them closely.