It’s the $75 trillion question facing world leaders as they gather for the G20 summit this week: Can a healthier U.S. economy thrive while most of the globe struggles to grow at all?
Nearly alone among major nations, the U.S. – which makes up more than 20% of the $75 trillion global economy -- appears to be accelerating.
Friday’s employment report extended the strongest streak of job gains since 1997, lending growth has revived, auto sales were healthy in January and consumer confidence climbed to a seven-year high.
The news has been good enough that traders and economists are again contemplating a possible move by the Federal Reserve to lift short-term interest rates form zero as early as June.
Meantime, policy makers in Europe, China, Japan and the emerging world continue to battle fragile recoveries and the menace of deflation with the familiar weapon of more cheap money.
Bank of America Merrill Lynch strategist Michael Hartnett Friday noted that central banks have cut rates a collective 542 times since September 2008, and despite indications of diminishing returns not all are finished.
As the European Central Bank helps drag some government bond yields there below zero with the promise of outright bond purchases, central banks in Canada, Australia, Denmark, China, India, Russia and Turkey are among those that have loosened policy in recent weeks.
And, of course, the nasty sparring between the combative new Greek regime and the country’s European bailout administrators feeds an anxious current through capital markets. Not to mention an apparent re-escalation of tensions over Ukraine.
This messy contrast between “here” and “everywhere else” has stoked plenty of debate over whether the U.S. can “decouple” from a sluggish world economy. It’s true that the American economy is less trade-dependent than most others, providing some insulation against stagnant demand elsewhere.
And while Fed policy officials included a mention of international growth worries in their last statement, Chair Janet Yellen has repeatedly downplayed such effects on her committee’s mandate and likely course of action.
Yet, as I discuss in the attached video with Yahoo Finance’s Jen Rogers, this “decoupling” idea has been tested before, with unsatisfying results. Amid the U.S. subprime-housing bust and lead-up to the recession in 2007, Wall Street economists proposed that the emerging markets could decouple from a flagging U.S. economy, which had long been the main engine of world growth. As we know, the ensuing meltdown spared no one.
Of course, there’s a happier prospect to be considered, that the U.S. could re-converge with other regions by helping to lead them toward a better growth path.
Ed Yardeni of Yardeni Research floats this notion here. And Don Rissmiller, economist at Strategas Research, responded to the strong Friday jobs numbers with this thought:
“History shows that a deceleration in nonfarm payroll growth occurs before U.S. recessions. So, if there’s going to be a global ‘recoupling,’ it is more likely that foreign economies reaccelerate, rather than the U.S. falling. True, this means U.S. policy rates should be higher. But the first Fed move will likely be from ‘zero’ to ‘still low.’ ”
The optimists’ camp can also point to stirrings of quicker growth in the euro zone, including strong manufacturing results in Spain and Germany and the best retail sales in the euro zone since 2007. Let’s recall that the steep decline in world oil prices are a great help both to Japan and Europe, which are heavy net importers of energy products.
Even if the happy convergence scenario takes shape, with the U.S. leading the globe to better times, it won’t be clear for some months to come. Which means that markets will continue to feint and juke with every scrap of economic data and whisper of policy shifts.
If growth picks up, the trillions stashed in near-zero-yield bonds will be at greater risk. And if it doesn’t, we’ll surely hear even more about Yellen being “trapped” and central banks’ impotence to energize a heavily indebted world.
It’s no wonder that the one popular prediction about 2015 that has so far come true is the call for more market volatility.