Does It Even Matter if the U.S. Has a Cold?
“We’re going through the longest stretch of concerted growth in decades,” said Lakshman Achuthan, managing director at the Economic Cycle Research Institute in New York.
So you might think that a sharp slowdown in growth in the United States — the domestic economy grew at a measly 1.3 percent annual clip in the first quarter this year, less than half the 2006 rate — would mean trouble for the rest of the global economy. Right?
As the domestic growth rate has declined sharply in recent quarters, the rest of the world is growing rapidly. India is blowing the door off its hinges. China’s economy is expanding at a double-digit pace.
In the United States, the Federal Reserve has held rates steady since last June, and its next move will most likely be a rate reduction to stimulate growth. The European Central Bank and the Bank of Japan, meanwhile, have been raising rates — lest their once-suffering economies overheat and spawn inflation.
“The U.S. slump in the first quarter didn’t pull down growth in Europe or Asia,” said Brad Setser, senior economist at Roubini Global Economics.
The seemingly countervailing trends — deceleration in America, full speed ahead abroad — have led some economists to wonder whether the United States and the rest of the global economy are going their separate ways. Some even suggest — shudder — that changes in the global economy have made the United States a less-central player.
“Four or five years ago, there was an important switch in the global economy,” said Stephen King, an economist based in London for HSBC. “Since then, other parts of the world have really grabbed the growth baton from the U.S.”
Until relatively recently, when the United States sneezed, the world caught a nasty cold. Today, Mr. King says, the United States has sneezed, but the world has gone shopping.
Mr. King notes that emerging markets like China, India, Central and Eastern Europe and the Middle East are injecting life into the European and Japanese economies through their enormous purchases of capital goods — all those construction cranes in Dubai, bullet trains in China, oil rigs in Russia. “Emerging markets’ share of global capital spending has risen from 20 percent in the late 1990s to about 37 percent today,” he said.
Western Europe is benefiting from rising trade with Eastern Europe, Russia, Asia and the Middle East. As a result, the euro zone, America’s largest trading partner, is simply not as reliant on the United States as it used to be, Mr. Setser said. “Europe is clearly no longer growing on the back of U.S. domestic demand growth,” he said. As other economies increasingly trade with one another, the United States plays a diminished role.
But the consensus for decoupling is hardly complete. The United States is still setting the pace, Mr. Achuthan said: “We led the world up, and the rest of the world revved up after us. And areas like Europe in particular will be slowing in the wake of our slowdown last year.”
The cars of the global economic train are still tethered tightly together, in his view. “It’s less of a decoupling“ he said, “and more like the jerking you get in a train when the first car stops, and then the other ones stop after a bit of a lag.”
David Rosenberg, an economist at Merrill Lynch, said he believes that the apparent divergence in the world’s big economies has more to do with the nature of the growth slowdown in the United States, which has stemmed not from a decline in consumption, but from a decline in investment — specifically in housing.
“Almost 100 percent of the U.S. slowdown has been due to the housing industry,” Mr. Rosenberg said. And housing is an intensely local and national industry — from the real estate broker to the mortgage lender, from Home Depot to interior decorators. “Unless you run a sawmill in Canada, international trade isn’t directly affected by the decline in U.S. housing,” Mr. Rosenberg said.
Martin N. Baily, a senior fellow at the Peterson Institute for International Economics in Washington, says he thinks that it’s a good thing for the United States if it’s no longer the leader. “We have a huge imbalance in our trade, and we need to be a little less of an engine of growth for the rest of the world, and let Europe and Japan, and hopefully China, eventually, pick up the slack,” he said. “And right now it seems like they’re doing so.”
But Mr. Baily added that we shouldn’t be so quick to believe that the world economy is significantly more independent of the United States than it was in the past. “I don’t think there’s been a complete decoupling,” he said. “A U.S. recession would dramatically slow growth in China and India.”
THE real test of the decoupling thesis, Mr. Rosenberg said, will come if consumer spending starts slowing down. Consumer spending in the United States, which is still on the rise, accounts for an astonishing 20 percent of the global economy, he said. “I find it hard to believe,” he said, “that the rest of the world is going to be immune to a consumer sector that’s primarily responsible for pulling in nearly $2 trillion of the world’s output.”
Consumer spending hasn’t fallen for a single quarter since the fourth quarter of 1991. And while there are factors affecting domestic consumer spending — higher interest rates, lower housing prices, higher gas prices — the indefatigable American spenders show few signs of letting up.
“Before we can say there’s a decoupling, we have to wait for a sneeze,” Mr. Rosenberg said. “All we’ve had is a runny