Tags: American | Exceptionalism | Global | Economy

'American Exceptionalism' Thrives as Global Economy Struggles

Sunday, 05 October 2014 11:22 AM

The U.S. is proving to be an oasis of prosperity in the midst of a troubled world economy.

Unemployment dropped to a six-year low of 5.9 percent in September as payrolls rose by a greater-than-forecast 248,000, a Labor Department report showed Friday. Other data last week showed U.S. factories had their strongest quarter in more than three years, while exports rose to a record in August.

St. Louis-based Macroeconomic Advisers bumped up its estimate of third-quarter growth to 3.3 percent, from 2.8 percent, after government data published Friday showed the U.S. trade deficit shrank in August to its lowest level in seven months.

“The internal dynamics of the economy are very strong right now,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, for consultants IHS Inc. “We can withstand a lot of shocks.”

U.S. stocks rose with the dollar as the jobs data boosted confidence in the economy. After weakening earlier in the week on concerns about global growth, the Standard & Poor’s 500 Index rose 1.1 percent Friday in New York. The Bloomberg Dollar Spot Index climbed to a four-year high.

The solid performance by the U.S. contrasts with what’s happening in much of the rest of the world. The euro area’s economy stagnated in the second quarter and is suffering from the softest inflation in five years, while a consumer-tax increase in Japan triggered its biggest economic contraction since 2009.

China Undershoots

China’s economy, which helped bring advanced economies out of the recession in 2009, this year may undershoot the government’s growth target of about 7.5 percent amid a property slump and the slowest expansion in factory output in five years.

“Matters can be described as American exceptionalism,” said Larry Hatheway, chief economist at UBS AG in London. “The U.S. is the only large economic bloc experiencing an acceleration of growth, preparing for a tightening of monetary policy and enjoying an appreciating currency.”

The divergence leaves foreign finance chiefs open to criticism from U.S. officials when they all gather in Washington next week for the annual meetings of the International Monetary Fund and World Bank.

White House economic adviser Jeffrey Zients last week identified Europe as the U.S.’s “number one area” of economic concern and said its policies are “too tight.”

The U.S. isn’t immune to the weaknesses evident elsewhere, of course. After August’s strong trade numbers, a coming slowdown in U.S. exports and a rise in imports will probably clip about a quarter percentage point off U.S. growth, according to David Stockton, a former director of economic research at the Federal Reserve.

Positive Outlook

Still, the U.S. outlook remains “relatively positive,” said Stockton, now a senior fellow at the Peterson Institute for International Economics in Washington. He sees the economy expanding at about a 3 percent annual rate through the end of next year, markedly faster than the 2.2 percent pace it has averaged since the end of the recession in June 2009.

That’s also much stronger than Stockton’s forecast of 2015 growth of 1.1 percent in the euro area and 1.5 percent in Japan.

Former Fed Chairman Alan Greenspan coined the term “oasis of prosperity” in the late 1990s as he pondered the ability of the U.S. economy to thrive while much of the rest of the world was suffering, particularly crisis-hit Asia.

Excess Debt

Now, the U.S. is breaking away from the rest of the world partly because it has made more progress in working off the debt-driven excesses that helped precipitate the worst recession since the Great Depression. Only the U.S. and Germany among major economies have reduced total public and private debt as a share of GDP since 2007, according to data compiled by the McKinsey Global Institute.

The others are still wrestling with the consequences of too much credit. Japan went ahead with its consumption-tax increase earlier this year in a first step toward tackling its huge government debt. China is struggling to rein in a shadow banking sector composed of trusts, leasing companies and other less-regulated financial firms. And banks in the euro area are waiting to see how they fared in asset reviews and stress tests carried out by their regulators.

Deleveraging Process

“The U.S. is probably three-quarters of the way through its deleveraging process, maybe even more,” Behravesh said. “Europe is probably not even at the half-way point and China is just starting.”

A combination of reduced debt and rising stock and property prices boosted U.S. household net worth to a record $81.5 trillion in the second quarter from a low of $55 trillion in the last recession, according to data from the Fed.

Companies in the S&P 500 Index are the healthiest in decades, with the lowest net debt to earnings ratio in at least 24 years, $3.59 trillion in cash and marketable securities, and record earnings per share.

The improved balance sheets are allowing households and corporations to step up their spending.

Consumer outlays rebounded in August as employment gains revived household earnings growth and encouraged Americans to return to shops and car dealerships. The 0.5 percent increase in purchases exceeded forecasts and followed little change in July, Commerce Department data showed.

Capital Investment

Companies are putting their profits to work by increasing capital investment. Orders for non-military capital goods excluding aircraft rose 0.6 percent in August after a 0.2 percent drop the previous month, according to separate Commerce Department figures.

President Barack Obama trumpeted America’s success in a speech Oct. 2 at Northwestern University in Evanston, Illinois.

“Our economy isn’t just primed for steadier, more sustained growth,” Obama said. “America is better poised to lead and succeed in the 21st century than any other nation on Earth.”

Kevin Brady, chairman of the Congressional Joint Economic Committee and a Republican lawmaker from Texas, took issue with Obama’s upbeat assessment of the economy under his stewardship.

“He can spin it as much as he likes, but the worst recovery of President Obama’s life is his own,” Brady said in a press statement released Friday.

The divergent world economy has monetary policy makers around the globe moving in different directions. Fed Chair Janet Yellen and her colleagues are on course to wrap up their bond purchase program next month, while European Central Bank President Mario Draghi said Oct. 2 that his institution will be buying assets for at least two more years.

Friday’s jobs numbers underscore the differences between the U.S. and elsewhere, according to Doug Porter, chief economist at BMO Capital Markets in Toronto.

“It simply reinforces the now-glaring theme of divergence between the robust U.S. expansion and fading activity in much of the rest of the world,” Porter wrote in a note to clients.

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The U.S. is proving to be an oasis of prosperity in the midst of a troubled world economy.
American, Exceptionalism, Global, Economy
Sunday, 05 October 2014 11:22 AM
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