Despite Global Woes, U.S. Economy Prospers
Like a gigantic, multilingual flea market, the nations of the world are blending inexorably into a single, global economy. At least, that is what we are often told.
Yet the striking contrast between boom times in America and hard times in much of the rest of the world underlines a different, less-discussed reality: In vital ways, the United States remains a nation apart, its prosperity based more on consumers in California than manufacturers in Malaysia, its financial health affected more by decisions in Washington than turbulence overseas.
Even last year’s financial disaster in Asia boomeranged into a benefit for most Americans, who already were enjoying a seemingly invulnerable economic upturn. Worried about the far-flung perils, the Federal Reserve cut interest rates three times, and consumers responded with a euphoric binge.
“Can the U.S. economy prosper just on internal, yuppie consumption?” asks Edward E. Yardeni, chief economist and global investment strategist of Deutsche Bank Securities in New York. “The answer--so far--is absolutely.”
No one doubts that America’s links to the global marketplace are important and growing. Yet mantra-like chants of “globalization” obscure the fact that most people’s livelihood still depends on the domestic economy, a colossal, $8.5-trillion web of commerce in which the world’s richest consumers lavish much of their money on homes, services and other things that never will be traded overseas.
Exports, meanwhile, an important gauge of this country’s links to the global economy, accounted for just 11.3% of U.S. economic activity last year, according to the Commerce Department. That figure has crept up only a few percentage points since the early 1980s and remains only a fraction of the share in Germany, Canada, Mexico and many other countries.
“The domestic economy is the big dog, and exports are the little bitty tail,” declares James F. Smith, a longtime forecaster and chief economist at the National Assn. of Realtors.
Now, as fears of a world financial meltdown recede, Smith’s observation is a reminder that for the United States at least, good economic forecasts--like virtue--begin at home. Economists have torn up their gloomy forecasts repeatedly, as evidence piled up that foreign woes were having surprisingly little impact on most of this country.
Ross C. DeVol, U.S. economist at the Milken Institute think tank in Santa Monica, puts it this way: “Globalization hasn’t gone quite as far as many of us like to espouse--including myself.”
Few would take issue with that at USG Corp., a producer of wallboard that is scrambling around the clock to keep up with the fierce demand. Although Asia and other regions have become a growing market for its products, USG still gets about 90% of its sales from inside the United States. This country’s boom in home buying and renovating has set off a free-for-all for scarce wallboard, and the Chicago firm is hurrying to complete five new plants.
“We’re running our plants now seven days a week, 24 hours a day,” says Richard H. Fleming, the company’s executive vice president and chief financial officer.
U.S. Stands Out in Global Market
Even when global forces obviously are at play, America’s uniqueness stands out.
Just last September, Federal Reserve Chairman Alan Greenspan uttered his now famous caution that the United States could not remain an “oasis of prosperity” in a world plagued by financial turmoil.
The warning seemed timely, coming as overseas financial shocks were threatening a credit crunch in this country. Forecasters warned of a sharp U.S. slowdown in 1999. The stock market looked shaky. Highly publicized corporate layoffs seemed to signal trouble on the horizon. Consumer confidence was starting to slip from its lofty heights.
Moreover, the overseas problems were hammering certain U.S. industries, notably in manufacturing, agriculture and energy production, along with particular regions, such as the Bay Area and Seattle.
But concerns that foreign travails would spread broadly into this country proved unwarranted. In part, Greenspan helped keep the United States an oasis by promoting three interest-rate cuts in the next few months, a development that delighted investors and sparked a surge in housing and other industries.
The Fed’s widely welcomed moves were a tacit recognition of America’s exceptional role in the global economy. They signaled U.S. vigilance to foreign countries, and bucked up American lenders, investors and consumers who were worried about news from overseas.
‘We’ve Clearly Been the Beneficiaries’
Yet there is another reason why the much-heralded slowdown proved a no-show on U.S. shores, a reason that goes to the heart of America’s unique status in the world.
Throughout the global crisis, and especially after Russia’s ruble default ignited a financial panic last summer, much of the world steered investments into the safer haven of U.S. financial markets. In addition, struggling nations in Asia and South America flooded this country with cheap imports, aimed directly at the wallets of wealthy American consumers.
These twin waves of capital and inexpensive imports helped push up the U.S. stock market and keep down inflation, no small feat for a hot economy with an aging upturn. “We’ve clearly been the beneficiaries of everybody else’s turmoil,” Yardeni maintains.
DeVol estimates, for example, that a tidal wave of $230 billion in capital flooded this country last year for stocks and corporate bonds, a development that stimulated the financial markets, enriched U.S. investors and bolstered consumer confidence. As recently as 1994, that figure came to just $54 billion, according to government figures.
“Though it was very poetic and interesting, in some ways it was inaccurate,” says Diane Swonk, chief economist and senior vice president of Banc One in Chicago, referring to Greenspan’s “oasis” remark. She also points out that the global headaches brought “ironic benefits” for U.S. companies--and thus consumers.
At Corona Clipper, a garden tool manufacturer in Riverside County, faltering Asian currencies meant that imported components and even complete tools were cheaper in U.S. dollars. Otherwise, the 75-year-old firm’s focus is firmly inside the United States, where it sells almost all of its tools.
The world economy “is hardly noticeable from the sales end of it,” notes Michael A. Clewell, purchasing manager.
Global Woes Sparked Concerns
Yet across the country, in the headquarters of Corona Clipper’s much-larger parent firm, signs of trouble in the global economy were triggering alarms, and for good reason.
Ingersoll-Rand, manufacturer of assorted industrial equipment and components, relies on foreign markets for roughly 40% of sales; Asia alone accounts for 10% of the total.
“We were all concerned,” recalls David W. Devonshire, senior vice president and chief financial officer at Ingersoll-Rand, which is based in Woodcliff Lake, N.J. “We spent quite a bit of time talking about it and looking at it.”
Yet the robust U.S. market dwarfed the foreign woes. Overall sales last year shot up 17%, aided by brisk U.S. business in Bobcat skid steer loaders used in construction and landscaping, Thermo King temperature control equipment used in transporting food, pharmaceuticals, flowers and other products, and other items.
On top of all that, Ingersoll-Rand saved money by picking up unexpectedly cheap engines from Japan that it uses in construction machinery.
As Devonshire sees it, successful efforts by corporate America to boost productivity with the help of new technology were a key reason the national economy has performed so strongly. He also cited the Fed’s interest-rate cuts and the enduring strength of the domestic economy.
“A lot of things had to go right, given the global economy, and in fact they have,” he says.
Could Overseas Recovery Hurt U.S.?
Not that the saga is over. One question, odd as it may sound, goes like this: If overseas distress ended up helping the U.S. economy last year, will overseas recovery end up hurting it in the future?
Recovery abroad, after all, could spark a homecoming of investment capital out of this country, with potentially negative effects for interest rates and the stock market.
The paradox is taken seriously by some economists who note that the United States this year is not likely to gain the “perverse benefits” of foreign turmoil, such as cheaper foreign goods.
“Quite likely, as Asia begins to recover, the most severe effects will be felt in the United States,” DeVol says.
Beyond that, there are signs that Japan’s need to finance its own record-high budget deficit will be a big lure for foreign capital. That could pressure U.S. interest rates upward in order to keep funds in this country.
“We’re seeing [higher rates] already in the bond market,” says Lawrence B. Lindsey, a former governor on the U.S. Federal Reserve and resident scholar at the American Enterprise Institute think tank.
He notes that interest rates on the widely watched 30-year Treasury bond have drifted to about 5.45% in recent days from as low as 4.70% several months earlier.
If it continues, such a trend could have far-reaching implications for Americans--who have engaged in a buying spree of homes and other big-ticket items financed with low interest rates--and the overall national economy.
“If interest rates go up--and I think they’re going to--how much longer can the stock market stay at these lofty levels?” Lindsey says.
And that leads to the greatest concern about the United States and its unusual role in the larger world economy: When the U.S. expansion ultimately falters, perhaps this country will bring the rest of the world down with it, including large regions still trying to claw their way out of the ditch.
Just recently, the World Bank lamented in a report that global prosperity “has become extremely dependent” on the U.S. economic engine. It is “not a healthy situation,” worries Uri Dadush, a senior official with the World Bank.
Yardeni of Deutsche Bank agreed that America’s unique strength remains the linchpin of an erratic global economy.
“If anything upsets consumers in the United States, the world is really going to be in trouble,” he says.
Still, few forecasters are betting on the negative outcome. Most expect the United States to enjoy another year of strong growth, even with assorted problems continuing overseas.
