May 6, 2007
Does It Even Matter if the U.S. Has a Cold?
By DANIEL GROSS
FOR the last several decades, the United States has functioned as the
main engine of growth in a global economy that has been moving with
"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
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 nose."
Daniel Gross writes the "Moneybox" column for Slate.com.