The U.S. economy appears to have a tailwind these days, with GDP growth, jobs numbers and the stock market all moving relentlessly in the right direction. But in many respects, the U.S. is an outlier among major global economies. Europe, China, Japan, and Russia are all experiencing weak or negative growth, which will eventually have an impact on U.S. growth.
The concern is less that other major economies are stuck in the doldrums will bring the U.S. into recession with them, but that they will hamper what could otherwise be a very strong U.S. economic recovery.
WHY THIS MATTERS
The U.S. economy finally feels as though it is on strong footing, but without strong trading partners, it’s hard to see a way for it to achieve sustained high-level growth. A slowdown in 2016 could derail both Obama’s and the GOP’s agendas and have major implications in a presidential election year.
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Lower economic growth in Europe and Japan in particular, “certainly is a weight on U.S. economic growth,” said Gus Faucher, a senior economist with PNC Financial Services Group. “Trade has roughly been a net positive for growth over the past year or so, but I think trade is going to be a slight negative for growth” in the near term.
The U.S. has a lot going for it at the moment, Faucher said. “The fundamentals in U.S. domestic demand are pretty strong, and pushing down oil prices has been a big positive for U.S.” However, he said, “That’s still not going to offset the drag from weak global growth.”
Another problem may sound counterintuitive at first: a strong dollar.
Investors have been buying up dollars recently, which makes U.S. exports relatively more expensive, putting U.S. manufacturers at a disadvantage.
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“In the last year the dollar has appreciated a lot, and I think that’s a big concern,” said economist Barry P. Bosworth, a senior fellow at the Brookings Institution. “It hasn’t shown up in the data yet, and we shouldn’t expect it to.”
The low price of oil and the economic uncertainty in other parts of the world have combined to make the U.S. economy look a little more robust than it might actually be, Bosworth said. “Our own economy is not that strong right now,” he said. “We’re going to be running a trade deficit, but not because our consumption is so strong. It’s because we can’t find adequate markets for our exports.”
However, he added, “The exchange rate does matter. It just matters with a long lag. It just takes a while for businesses to decide to change where they produce. I think it is going to be a significant problem at the end of the year, going into 2016.”
And the problems could grow if U.S. trading partners don’t recover.
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“One of the things I think people are overlooking is that not only does a stronger dollar hit U.S. exports, but it eventually begins to affect domestic spending and domestic growth,” said Samuel Rines, an economist with Chilton Capital Management in Houston.
Because of a beneficial exchange rate, Rines said, foreign manufacturers such as Toyota, can cut prices on products sold in the U.S. without suffering a decline in profits when the proceeds are converted back into their home currency.
“The U.S. benefits from global growth partly because we are still the largest manufacturer, but to a great extent the way we benefit is through being the dominant force in global trade,” he said.
“We do a great deal of trade with Japan and Europe and we have seen the U.S. grow fairly well even when they are stagnating.” However, he said, it’s now getting to the point where “the U.S. really needs some of those importing zones to pick up.”
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Finally, the economy that lives by high oil prices might die by them, too.
“The U.S. is a huge beneficiary of lower oil prices,” Rines conceded. But he warned that continued low prices will eventually hurt the industry that has been the most consistent producer of well-paid low-skilled jobs.
As the oil patch begins to suffer from the price decline, he said, “That is going to be a big headwind to the US. When you don’t have the lower skilled high wage job growth it’s difficult to replace with anything.”
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