High U.S. Nominal GDP growth unsustainable

Editor's note: The author of this article is He Weiwen, senior fellow at the Center for China and Globalization. The article reflects the author's opinions and not necessarily the views of CGTN.

The U.S. Bureau of Economic Analysis announced last week that the U.S. GDP grew by an annual rate of 3.3 percent in the fourth quarter of 2023, and the whole year registered a 2.5 percent growth. The performance is pretty sound compared to the less than 1 percent growth in most other developed economies, with Germany even suffering a 0.3 percent fall. In nominal terms, the U.S. GDP in 2023 hit $27.36 trillion, an increase of 6.3 percent, or net $1.61 trillion, over 2022.

No recession and no strong production growth

The strong performance of the U.S. economy failed many doomsaying economists who have estimated again and again an imminent recession, or a high probability of recession in the U.S. The reason is simple: the persistent strong labor market and hence the strong personal consumer spending has supported the whole economy.

Throughout 2023, personal consumer spending made the largest contribution to the U.S GDP growth, consisting 60 percent of all its GDP growth, or an increase of 1.49 percentage points. In comparison, private investment contributed a negative 0.21 percentage point. Among private investment, fixed investment, one of the economic fundamentals, contributed only 0.09 percentage point. Equipment investment, also the material base for economic growth, even contributed a negative 0.01 percentage point. The weak performance of investments can also be proven by the weak performance of industrial production.

There was no strong manufacturing return at all. The Federal Reserve data showed that total industrial production index grew by 1 percent in 2023, with the manufacturing production index up 1.2 percent. Furthermore, during the second half of 2023, the industrial production index fell by 0.8 percentage point and that of the manufacturing production by 0.5 percentage point despite a stronger GDP performance during that period.

The strong 2023 GDP growth was also supported by net export (contributing 0.58 percentage point) and government spending (0.27 percentage point). The phenomenal contribution by net export was primarily a logical result of fall in import. The latter, in turn, was a logical result of Washington's de-risking (a new narrative for de-coupling) and the "small yard; high fence" policy, which led to a drastic fall in its import from China and other East Asian economies. The contribution by government spending was at a high cost of the federal budget deficit spiraling and hence the national debt explosion.

The observation on the four fundamentals contributing to the 2.5 percent growth in the U.S. economy in 2023 could lead us to the conclusion: relatively strong U.S. economic growth was supported by government spending, which supported consumer spending, as well as Washington's geoeconomic fragmentation policy rather than the real economy production.

High cost of growth unsustainable

The continuously high federal government spending on rescue plans for families, job creation and infrastructure projects – while supporting personal income increase, consumer spending and the labor market – has created a huge federal budget deficit which hit $1.7 trillion in financial year 2023, or 6.6 percent of GDP, far exceeding the safety line of 3 percent. During the first quarter of financial year 2024 (fourth quarter of 2023), the deficit soared to $509.9 trillion, or over $2 trillion at an annual rate.

The huge federal deficit, in turn, was supported by the even more astonishing federal debt. By January 29, total national debt reached $34.14 trillion, a net increase of $2.68 trillion in less than seven months since the Congress okayed the ceiling break. The Fed itself is also in a dilemma: It must buy Treasury bills (T-Bills) to support the federal budget on the one hand, and must raise and then keep the federal rate to check inflation on the other. Then the dilemma falls on the federal government: it must keep selling T-Bills to the Fed to get money on the one hand, and pay high service (interest and principal) on the other hand. Apparently, the growth of an economy with a high reliance on a high budget deficit and high national debt is not sustainable.

Fast nominal U.S. GDP growth temporary

The U.S. nominal GDP (in dollar terms) experienced astonishingly fast growth during the past three years. It hit $27.36 trillion in 2023, 6.3 percent higher than 2022. During the past three years, between 2020 and 2023, nominal U.S. GDP grew by 29.9 percent, or 9.1 percent per year. The only explanation is high inflation. In 2023, the GDP price deflator was 3.4 percent, making a nominal growth of 6.3 percent with an actual growth of 2.5 percent. With the inflation retreating fast, the nominal growth rate is also retreating. The 6.3 percent nominal GDP growth rate was already much lower than the 9.1 percent growth in 2022 and the 10.7 percent in 2021. It will be hardly over 5 percent for 2024 and even lower for 2025.