Sunday, September 23, 2007

Changes Ahead for the US Economy Relative to the World’s Other Economies

The excerpts below from a WSJ article indicate that years of excessive importing by the US may be coming to an end for a variety of reasons. Maybe in the future when the US sneezes the rest of the world will wonder who is catching cold.

For years, economists have warned that the U.S. can't run up endless charges on the national credit card to cover its huge appetite for imported cars, oil, electronics and other goods. Someday, they said, the bill will come due.

After 16 years during which the U.S. mainly borrowed and bought while much of the rest of the world lent and sold, the global economy appears to be undergoing a fundamental shift. American exporters are finding eager overseas markets for their products. U.S. consumers are beginning to temper their free-spending ways as the housing boom turns to bust. China, the Middle East, central Europe and Africa are absorbing more of the world's imports. The result: Instead of depending as heavily on the U.S. for demand, the world economy could become more evenly balanced. . . . . The massive U.S. trade imbalance is the product of a tangle of causes and effects. It springs largely from foreign-exchange rates, the attractiveness of U.S. financial markets, the profligacy of U.S. consumers versus the thrift of consumers elsewhere and persistent differences in economic growth rates among countries.

Between 1999 and 2006, the U.S. economy grew an average of 2.9% per year, while Germany and Japan each limped along at 1.4% growth rates, according to the IMF. Faster growth means more imports. The richer Americans felt, the more they spent on Chinese toys, German motorcycles, Mauritian shirts or Japanese cars. The housing boom gave consumers a sense of well-being that led them to spend more freely than ever.

At the same time, the growth differential served as a lure for foreign investors. Generally speaking, it's easier to make money investing in stocks in a steadily growing economy than a more languid one. The temptation is especially strong when the financial markets are as deep and liquid as those in the U.S are.

The U.S. government compounded the effect by overspending its budget and issuing Treasury securities to cover its debts. The central banks of China and Japan, among others, have bought trillions of dollars in U.S. notes.

More foreign currency chasing fewer dollars made each dollar more valuable. The stronger dollar, in turn, reverberated through the economy again, making imports relatively cheaper and U.S. exports relatively pricier. The strengthening dollar made U.S. stocks, bonds and other investments even more attractive to foreigners because they were more valuable in euros, yen, pounds or other currencies when the investors cashed out.

For many years, the combination of those forces led the U.S. to buy far more from overseas than it sold abroad. In the second quarter of this year, the current-account deficit measured $191 billion, or more than $760 billion on an annualized basis. To pay for those imports, the U.S. has to attract $2.1 billion in foreign investments every day.

Conditions, however, have changed dramatically. These days, U.S. growth lags behind that of many of its overseas trading partners. The IMF is projecting 2% growth for the U.S. in 2007, and 2.6% growth for Germany and Japan. The 13 countries that share the euro are expected to grow 2.5% this year, according to Bank of America.

American consumers' endless confidence and insatiable appetite at the mall appear to have been jolted by falling house prices and, more recently, tight credit conditions. "The forces that had been supportive to excess consumption for a decade are now headed the other way, and the U.S. consumer just can't keep driving...America's current-account deficit to higher highs," says Stephen Roach, chairman of Morgan Stanley Asia in Hong Kong. Mr. Roach calls that "one of the key conditions...that could be critical in triggering a long-overdue rebalancing of the global economy."

Indeed, the slowing domestic economy already appears to be stifling growth in American demand for foreign goods. The U.S. share of global imports has fallen to 14.3%; the lowest since the recession of 1991-92, according to IMF data. In 2000, the U.S. soaked up 18.8% of world imports. By contrast, Brazil, South Africa, India and other developing countries now account for 40.1% of global imports, up from 28.4% in 1991. "We're not the sole market of last resort," says Mr. Quinlan, the Bank of America strategist. (my emphasis)

The slowing economy and uncertainty about U.S. financial markets are feeding back into the currency markets. "I expect to see more and more weakening of the dollar in the coming months and years," predicts Princeton economist Alan Blinder, a former vice chairman of the Federal Reserve Board. Currency trends are notoriously hard to predict, though. Mr. Blinder confesses that he thought the dollar was embarking on the long march downwards in 2002, only to see it pick up again in 2004. The Japanese yen has not gained much ground on the dollar compared to 10 years ago.

. . . . There are still obstacles to a smooth rebalancing of global trade flows, and China is one of the biggest. Beijing has been reluctant to allow its currency, the yuan, to rise much against the dollar, despite fierce pressure from U.S. lawmakers and business executives who say that the artificially weak currency gives Chinese companies an unfair edge over American firms. The yuan has appreciated about 10% against the dollar since Beijing first allowed it to move in July 2005, but U.S. manufacturers -- backed by Treasury Secretary Henry Paulson -- say that's not far enough or fast enough to allow even-handed competition.

While China and India are bigger markets for U.S. companies than they used to be, "there are nearly one billion workers in Asia who earn less than $2 per day," says Bank of America's Mr. Quinlan. "They can afford a Coke, but until they can afford a car and computer, global rebalancing will proceed slowly."

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