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Robust exports to China and other emerging markets will help stabilize the U.S. economy, but U.S. demand will be too weak to offer its traditional support to world growth
Two years ago, decoupling was all the rage. It was the notion that, because of rapid economic progress outside the U.S., the world was no longer dependent on the U.S. for growth. The theory came crashing down as the U.S. recession turned into a global rout. Now the idea is making a comeback. In past global recoveries, the U.S. has always been the locomotive of growth, as resurgent demand for foreign-made goods helped to revive overseas manufacturers. This time, the leadership is coming from the East, especially China and other emerging-market economies in Asia.
The pattern is evident in the latest U.S. trade data. Through May, imports continued to fall. They will stay subdued for some time, as U.S. consumers remain shackled by weak labor markets and the need to save more. U.S. exports, however, are now steadying after last year's plunge, and a sharp advance in shipments to China and other Asian nations is the chief reason for the stabilization. Since January, exports to all of Asia, excluding Japan, have jumped 22%, accounting for 75% of the pickup in U.S. exports.
These trends have pushed the monthly trade deficit to the lowest level since late 1999, and they are helping to stabilize the U.S. economy. The surprise narrowing in the May trade gap to $26 billion, from $28.8 billion in April, reflected a 1.6% jump in U.S. exports and a 0.9% decline in imports. After adjusting for inflation, economists believe the shrinkage in the deficit added more than a full percentage point to second-quarter growth in real gross domestic product. Real GDP is still expected to shrink, but that boost provided a major moderation in the economy's pace of contraction.
To a great extent the global recovery now taking shape is a traditional industrial rebound, driven by the need to restock inventories after the major liquidation resulting from last year's steep drop-off in demand. This impetus is especially powerful in Asia. Economists at JPMorgan Chase (JPM) estimate industrial production across the region grew at a 30% annual rate in the second quarter. Because manufacturing accounts for nearly 30% of GDP in Asia's emerging markets, the bounce may have added some nine percentage points to the region's economic growth last quarter. That strength is helping to fuel U.S. exports: America's shipments of materials and supplies jumped 9.8% in May, the largest gain in 15 years.
Growing support from exports, along with more stability in consumer spending, is helping U.S. manufacturing to rebound as well. Industrial production, which fell 0.4% in June, is set to post gains this summer. Efforts to slash inventories have left production well below demand, creating the need for more output to replenish some of the depleted stockpiles. That's expected to be the chief factor lifting real GDP growth back into positive territory this quarter.
Autos will play a major role. Car inventories shrank by a record amount in the second quarter, mainly reflecting bankruptcies at Chrysler and General Motors. Based on industry schedules, output is set to jump more than 60% in July. Economists at Barclays Capital (BCS) estimate U.S. industrial production will post a 2.1% advance this month.
Of course, sustaining any inventory-related rebound in U.S. output will depend on a pickup in demand, and exports alone won't do the job. U.S. consumers, however, will not be in a position to offer their traditional support. In the first year of recoveries dating to the 1970s, consumer spending, on average, contributed 3.5 percentage points to overall growth in real GDP. But that kind of oomph is hardly likely this time.
The upshot for global growth is that the U.S. will not be pulling in imports the way it has in past recoveries. Consumers are cutting back on discretionary items, such as autos, electronics, and clothing, which are often imported. The plus for the U.S. is that higher household saving and a smaller trade deficit will reduce the U.S. need for foreign finance, especially at a time of hefty government borrowing. But in the process, the U.S. will yield some of its leading role in world growth.