The U.S. economy looks better able to withstand the hit from a stronger dollar and weaker global growth than the stock market did last week.
Foreign sales last year accounted for 46.3 percent of revenues for companies in the Standard & Poor’s 500 Index in 2013, leaving them prone to a rising greenback and the recent slowdowns in Europe and Asia, according to S&P Dow Jones Indices in New York. By contrast, U.S. exports compose just 13.5 percent of the economy.
“The U.S. economy is less open than the S&P revenue base,” said Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York. “There are good reasons to think growth will continue to be above trend.”
Hatzius sees the U.S. poised to expand 3.2 percent next year, outpacing the average annual rate of 2.2 percent since the recession ended in June 2009. The brighter outlook helped soothe nerves at the weekend’s annual meeting of the International Monetary Fund in Washington, otherwise dominated by renewed concern over Europe’s economy.
“The U.S. economy has finally shifted into a higher gear,” Karen Dynan, assistant secretary for economic policy at the U.S. Treasury Department, told a conference organized by the Institute of International Finance. “There is a good bit of underlying momentum.”
That’s a relief when the euro-area is on the brink of a third recession since 2008, China is struggling with a property slump and a consumption tax hike has hurt Japan’s recovery. Such softness has sent the Bloomberg Dollar Spot Index surging almost 7 percent since June.
Investors tuned into the overseas malaise last week as the S&P 500 Index posted its biggest weekly drop in two years, falling 3.1 percent to 1,906.13. In other signs of concern, yields on U.S. Treasury securities fell and oil tumbled in price by the most since January to enter a bear market.
“Can the U.S. really be an island of growth?,” said Morgan Stanley’s co-chief economist Joachim Fels, posing the question from the audience during an IMF conference panel. “The financial markets in the last few days have told us probably not.”
Federal Reserve officials have also turned cautious. “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Vice Chairman Stanley Fischer said Oct. 11. Governor Daniel Tarullo said the same day he’s “worried about growth around the world right now.” Both spoke during the IMF conference.
Putting it all together, the impact of various international market moves on the domestic economy is about a wash, according to Hatzius. While a rising dollar will curtail exports and lower stocks will reduce household wealth, a drop in long-term interest rates and energy prices will be a plus for the economy.
Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York, sees a “temporal distinction” in the way the market moves will affect growth. Cheaper gasoline will boost consumer spending “within a quarter or two” while the drag from a stronger greenback is “much more drawn out” over a year or more, he said.
Wages also look like they’re about to pick up, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. An index put together by Moody’s using payroll data from the ADP Research Institute shows wages rising 4.1 percent over the past year after adjusting for inflation.
The U.S. has ridden out a variety of shocks over the last few years, from the euro debt crisis in 2011 and 2012 to the taper tantrum in the middle of 2013 that saw long-term interest rates shoot higher, said James Sweeney, managing director of global strategy for Credit Suisse Group AG in New York. He sees no reason to think this time will be different.
At Wells Fargo Securities LLC in Charlotte, North Carolina, global economist Jay Bryson likens the current environment to the Asian crisis of 1998 which undermined financial markets yet wasn’t enough to derail a record-breaking U.S. expansion.
The rest of the world would have to suffer a “very pronounced decline” to hurt the U.S. given that two-thirds of the economy is reliant on services, much more than exports, he said.
Indicators released last week suggested the U.S. economy is powering ahead. The number of Americans filing applications for unemployment benefits fell in the week ended Oct. 4, pushing the average over the past month to the lowest level in eight years, the Labor Department said. Job openings also climbed to a 13-year high in August as employers gained confidence in the world’s biggest economy.
Still questionable is how much lift the U.S can provide overseas. IHS Inc. chief economist Nariman Behravesh reckons the U.S. is now the “locomotive of global growth” for the first time since the global recession of 2009.
Reasons to think it won’t be as powerful an engine as in the past include the smallest current account deficit since 1998, a reduced need for imported energy because of the shale revolution and the fact that its share of worldwide gross domestic product has shrunk.
“The U.S. was a source of stability before 2007,” said Stephen King, chief economist at HSBC Holdings Plc. “Since the financial crisis, the U.S. has stopped playing that role.”
Fears in the financial markets that the U.S. will be dragged down into a global slowdown will eventually be put aside, said Sam Stovall, U.S. equity strategist for S&P Capital IQ in New York. He forecasts that the S&P 500 Index will rise to 2,200 over the next 12 months.
“The pickings are so slim for international investors that they’re basically saying the best opportunities are coming from the U.S.,” Stovall said.
Investors may also soon realize there is even an upside for U.S. stocks from weakness abroad as it restrains commodity prices, bond yields and imported inflation to give consumers and companies a lift, said Roberto Perli, a partner at Cornerstone Macro LP in Washington.
“The U.S economy has decoupled from other major economies,” he said in an Oct. 10 video presentation to clients. That ultimately could prove to be a “net advantage” for U.S. equities, he said.