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China
is trying to slow its breakneck pace of economic growth.
The US could use a little of what China has too much of.
Are the two countries working at cross purposes?
The
notion of a global growth cycle, with countries taking
their cues from the US, is being challenged as Asia’s
developing economies continue to boom amid a slowdown in
the US.
In this
new age of globalization, synchronicity is out,
decoupling is in. Yes, China and India are growing in
ways that may be independent of the business cycle.
(China, for example, just snags a bigger market share of
global exports.) Still, it’s much too early to conclude
that the
US
slowdown will be a non-event for the rest of the world.
“The
oldest rule of economic forecasting in the modern era
still holds, even in the earliest years of the 21st
century,” says Carl Weinberg, chief economist at High
Frequency Economics in
Valhalla,
New York.
“When America sneezes, the world catches a cold.”
Weinberg
reviewed 20 years of year-over-year and annual gross
domestic product data for the
US
and the six developed countries (Japan, Canada, Germany,
France, the UK and Australia) he tracks. He found that
the six economies’ growth rates moved in the same
direction as the US two-thirds of the time.
US
real GDP growth, measured on a year-over-year basis,
downshifted from 3.1 percent in the fourth quarter of
2006 to about 2 percent in the January-to-March quarter
this year. (The Commerce Department is expected to
revise down its initial estimate of first-quarter growth
from 1.3 percent to 0.7 percent next week.)
Contemporaneous relationship
Growth
in the
UK,
Japan and the Euro zone slowed in the first quarter as
well, and Weinberg expects Canada and Australia to
follow suit when they report next week. The reason for
believing synchronicity is still the operative model is
“the
United States
is still the largest importer of goods and services in
the world,” he says. Europe’s “gross imports may be
larger,” but much of that trade is with member
countries.
US
import growth slowed in the past year, in both real and
nominal terms, with oil included and without it. China’s
exports, however, are “cyclically immune,” Weinberg
says.
It’s
somewhat surprising that the relationship between US and
foreign growth is contemporaneous, not lagged. After
all, today’s orders for foreign goods are clocked as
imports (in the trade data) when they arrive in the US a
couple of months hence.
Weinberg
says intuition implies a lagged relationship, but
“empirical evidence suggests there is not. The response
of imports to demand is quick.”
Global
immunity
Not
everyone subscribes to the old US cold-contagion model.
Some economists argue the world has become increasingly
immune to American viruses.
“The
evidence is overwhelming that the global economy has
decoupled from the US,” says Alex Patelis, head of
international economics at Merrill Lynch & Co. in
London. “Domestic demand growth elsewhere has
accelerated, overcompensating for the negative US
impulse.”
A boom
in capital spending, with a larger role played by
emerging countries, is one reason the onus is off the US
to keep the world humming.
“Global
capital spending has increased faster than real consumer
spending and overall GDP the past four years,” says Joe
Carson, director of global economic research at
AllianceBernstein.
Capital
over consumer
From
2003 through 2006, capital-spending growth averaged 16.5
percent annually in emerging countries compared with 3.5
percent in the developed world, Carson says. Much of the
increase was in “infrastructure—airports, ports,
transportation systems, energy generation and other
types of commercial and service-related projects”—which
has different implications for global growth than
investment to add capacity for consumer goods output, he
says.
Of
course, no discussion about global growth would be
complete without reference to the US consumer, who
dwarfs his counterparts overseas. Consumer spending in
the US totaled an inflation-adjusted $8 trillion in
2006, well above second-place winner Japan, with $2.5
trillion, Carson says. Germany came in third with $1.1
trillion, followed by the
UK
at $1 trillion.
Global
growth seems to be “smoothing the US business cycle” and
cushioning the profit cycle, with roughly 35 percent of
first-quarter profits coming from international
operations,
Carson
says.
Him
again
So while
US imports (some other country’s exports) have slowed,
strong commodity prices suggest “the world is holding up
OK,” Carson says.
Listening to economists argue the impact of the US on
the rest of the world, I’m reminded of something that
old wordsmith, Alan Greenspan, said in September 1998.
With Russia defaulting on its debt and hedge fund
Long-Term Capital Management (LTCM) on the verge of
collapse, the (at the time) Federal Reserve chairman
warned that “it is just not credible that the US can
remain an oasis of prosperity unaffected by a world that
is experiencing greatly increased stress.”
He was
wrong. The
US
economy sailed right through the crisis, with some
official (interest-rate cuts) and unofficial (a
Fed-orchestrated bailout for LTCM) help from Greenspan.
Now the
tide has reversed. Is it credible that the rest of the
world can remain an oasis of prosperity in the face of
distress in the US? We await Greenspan’s verdict, not to
mention a new desert metaphor.
Caroline Baum, author of Just What I Said, is a
columnist for Bloomberg News. The opinions expressed are
her own. |
