New American Economy Leaves Behind World ConsumerSimon Kennedy
The rising American economy isn’t lifting all boats -- and may even sink some.
As the U.S. looks set to accelerate, economists from Bank of America Corp. to Morgan Stanley predict it will provide less oomph abroad than it once did, partly because of changes wrought by the financial crisis and recession. The new-look America is focused on greater demand and production at home and taps more of its own energy, paring the need to buy overseas in a trend reflected by the smallest current-account deficit since 1999.
A healthier U.S. even could come at the expense of emerging markets if it turns into more of a competitor than consumer by boosting manufacturing. Developing countries also risk being hurt once the Federal Reserve withdraws its monetary stimulus, driving their cost of borrowing up and their currencies down against a resurgent dollar.
“There are signs that U.S. pulling power may not be as strong as experienced in recent years,” said Gustavo Reis, a senior international economist at Bank of America in New York. “If we want to see stronger global growth, we need the U.S. to grow but others to rebound, too.”
Finance ministers and central bankers will pore over the outlook this week in Washington at the annual meeting of the International Monetary Fund. The lender will update tomorrow its forecasts for worldwide expansion of 3.1 percent this year and 3.8 percent in 2014 after Managing Director Christine Lagarde said last week that growth “remains subdued.”
One surprising reason for that may be the ebbing influence of the U.S. even as the median forecasts of economists surveyed by Bloomberg News point to expansions of 2.7 percent in 2014 and 3 percent in 2015, up from 1.6 percent this year.
The government shutdown may be a near-term hurdle. Another poll suggests it will shave 0.1 percentage point from growth after one week. Failure to raise the U.S. debt ceiling would be even more of a threat given Goldman Sachs Group Inc. economists estimate that could require the government to squeeze fiscal policy by an annualized 4.2 percent of gross domestic product, risking an economic slump if not reversed fast.
Stocks declined, extending losses from last week, as U.S. lawmakers remained deadlocked over extending the debt limit to avoid default. The MSCI All-Country World Index slid 0.4 percent to 382.23 at 11:52 a.m. in New York while the Standard & Poor’s 500 Index sank 0.4 percent and the Stoxx Europe 600 Index slipped 0.2 percent.
A 1 percentage point pickup in U.S. GDP growth typically meant a 0.4 point spillover for the rest of the world, according to Reis. The pulse now may be moving toward 0.3 point, which if reached, would amount to a 25 percent drop in America’s overseas clout.
If U.S. economic performance does get better in such an environment, then investors should buy the dollar as the faster recovery spurs borrowing costs, according to foreign-exchange strategists at Morgan Stanley and Citigroup Inc. They should sell emerging-market currencies as capital flows return to the U.S., imposing higher interest rates and subsequently weaker activity on the former locomotives of global growth.
A potential taste of things to come was evident in the summer, when even the suggestion that the Fed would begin slowing its $85 billion in monthly asset purchases was enough to undermine emerging-market bonds and currencies. Those markets rebounded after the Fed decided Sept. 18 to continue its quantitative-easing program.
The one-two punch of softer external support and funding pressures would pose the biggest challenge to Brazil, Turkey, South Africa, India and Indonesia, strategists at Goldman Sachs said in a Sept. 5 report. The Czech Republic, South Korea and Mexico are better positioned to enjoy what U.S. support there is and have less reason to worry about financing, they said.
More U.S. demand would mark a change from recent history when trade partners harnessed a strengthening American economy and currency to power exports. In the run-up to the 2008 financial turmoil, the U.S. was credited with serving as the world’s consumer of last resort.
That was evident in how American imports of non-petroleum goods and services rose to about 12 percent of GDP in 2000 from about 7 percent in 1994 and added a couple more percentage points more from 2003 to 2007, according to Steven Englander, Citigroup’s head of Group of 10 currency strategy in New York. In recent years, imports have flattened at about 14 percent of GDP, meaning the foreign impact of extra U.S. growth will be “negligible,” he said.
The U.S. current-account deficit already suggests U.S. foreign consumption is waning, having narrowed to about 2.5 percent of GDP from almost 6 percent in 2006. The last time it was so low was 14 years ago.
“There is plenty of reason to think the contribution of U.S. growth to the rest of the world will be much less than in previous rebounds,” said Englander, a former Federal Reserve Bank of New York researcher.
A faster-growing U.S. still would be favored internationally over a renewed slowdown, said John Calverley, head of macroeconomic research at Standard Chartered Plc in Toronto. A bigger economy would mean Americans buying more goods from abroad, and recovery-led gains in U.S. equities would improve financial conditions globally.
“Emerging markets would prefer a rising U.S. market than one that was weak,” he said.
A study of spillovers published by the IMF last week found that although economies aren’t correlated as much as they were during the crisis, the U.S. “still matters most from a global perspective.” A 1 percent positive surprise in its growth rate increases output elsewhere by 0.2 percent after two years, twice the effect of similar accelerations in China and Japan, it said.
One explanation why the U.S. engine may be slowing overseas is that its share of worldwide GDP shrank to 22 percent this year from 31 percent in 2000, according to IMF data. In the meantime other sources of demand have emerged, including China, which now accounts for 12 percent of global output, up from 4 percent in the same period.
Bank of America’s Reis argues that the “quality” of U.S. growth is changing from the consumption-led boom of a decade ago that aided manufacturers abroad, especially in Asia. While consumption will edge up 2.5 percent next year compared with 2 percent in 2013, Reis says the driver this time will be an 18 percent jump in spending on homes -- good for Canadian lumber producers but not for many other foreign businesses.
The U.S. also is now less in need of foreign energy thanks to increased domestic output amid the development of fracking, which draws on reserves in shale-rock formations. America churned out an average 7.2 million barrels a day of crude since the start of January, the highest since about 1991, and Credit Suisse Group AG estimates the inflation-adjusted petroleum trade deficit has fallen 54 percent since 2006.
Such trends will boost the U.S. trade position by more than $164 billion in 2020 -- a third of the present shortfall -- as the need for energy imports declines and U.S.-based fuel-intensive industries become more competitive, according to a September study by Lexington, Massachusetts-based IHS Inc. EOG Resources Inc. and Pioneer Natural Resources Co. are among the Texas-based oil explorers whose stocks have soared this year.
The fresh energy supplies also may combine with competitive labor costs and cash-rich corporate coffers to propel a recovery in manufacturing within the U.S., leaving the country less reliant on goods from abroad. A Citigroup report in May predicted a reversal of the 50-year decline in manufacturing’s share of GDP, including the creation of 2 million jobs.
Another theme is that U.S. companies are increasingly repatriating production from China and other emerging markets, which lured it with cheaper labor costs.
Fifty-four percent of U.S. manufacturers with sales topping $1 billion are planning to or considering bringing back factory-lines from China, up from 37 percent in February 2012, the Boston Consulting Group said Sept. 24, citing a survey of 200 executives. It projects that with Chinese wages and benefits rising 15 percent to 20 percent a year, the cost of operating in China will be the same as staying in the U.S. by 2015.
Trellis Earth Products Inc., a Portland, Oregon-based producer of bioplastics, said in July it is moving its manufacturing operations to New York state from China, investing $8.3 million and creating almost 200 positions.
“What you see is more companies reshoring and bringing jobs back,” said Harold Sirkin, a Chicago-based senior partner at BCG. “Previous headwinds are turning into tailwinds.”
A further challenge for emerging markets is that reindustrialization means Americans are again finding it profitable to produce less-sophisticated products such as fabricated metals and chemicals, said Manoj Pradhan, global emerging-markets economist at Morgan Stanley. Those are the very goods that countries like China would have wanted to start supplying to maintain their development.
The growth divide could be reinforced once U.S. companies ramp up capital spending, which Morgan Stanley predicts will grow 6 percent in each of the next two years, compared with 2.25 percent this year. Such outlays are likely to benefit Germany and Japan and perhaps specific sectors such as information technology in India, rather than developing nations as a whole, he said.
The silver lining is that greater competition internationally should force governments to take steps to raise productivity, Pradhan said. The rebalancing of demand around the world also could be welcomed by the IMF, which has suggested an over-reliance on the U.S. for growth helped spark the financial crisis.
“In the long run, this is a win-win,” said London-based Pradhan. “That’s still a long way away, but good news nevertheless.”