U.S. Retakes Helm of Global Economy
The U.S. is back in the driver’s seat of the global economy after 15 years of watching China and emerging markets take the lead.
The world’s biggest economy will expand by 3.2 percent or more this year, its best performance since at least 2005, as an improving job market leads to stepped-up consumer spending, according to economists at JPMorgan Chase & Co., Deutsche Bank AG and BNP Paribas SA. That outcome would be about what each foresees for the world economy as a whole and would be the first time since 1999 that America hasn’t lagged behind global growth, based on data from the International Monetary Fund.
“The U.S. is again the engine of global growth,” said Allen Sinai, chief executive officer of Decision Economics in New York. “The economy is looking stellar and is in its best shape since the 1990s.”
In the latest sign of America’s resurgence, the Labor Department reported on Jan. 9 that payrolls rose 252,000 in December as the unemployment rate dropped to 5.6 percent, its lowest level since June 2008. Job growth last month was highlighted by the biggest gain in construction employment in almost a year. Factories, health-care providers and business services also kept adding to their payrolls.
About 3 million more Americans found work in 2014, the most in 15 years and a sign companies are optimistic U.S. demand will persist even as overseas markets struggle.
U.S. government securities rose after the report as investors focused on a surprise drop in hourly wages last month. Ten-year Treasury yields declined seven basis points to 1.95 percent at 5 p.m. in New York on Jan. 9.
“We are still waiting to see the kind of strengthening of wage numbers we would expect to be consistent with what we are seeing elsewhere in terms of growth and the absolute jobs numbers,” Federal Reserve Bank of Atlanta President Dennis Lockhart said in a Jan. 9 interview.
The U.S. is breaking away from the rest of the world partly because it has had more success working off the debt-driven excesses that helped precipitate the worst recession since the Great Depression.
“The progress has been far greater in the U.S.,” Glenn Hubbard, dean of the Columbia Business School in New York and a former chief White House economist, told the American Economic Association annual conference in Boston on Jan. 3.
Delinquencies on consumer installment loans fell to a record-low 1.51 percent in the third quarter, the American Bankers Association said on Jan. 8. That’s “well under” the 15-year average of 2.3 percent on such loans, which include credit cards and borrowing for car purchases and home improvements, it said.
U.S. households have benefited from the strengthening job market and the collapse in oil prices. The nationwide average cost of a gallon of regular gasoline was $2.17 on Jan. 8, the cheapest since May 2009, according to figures from motoring group AAA.
While wage gains have lagged — average hourly earnings fell 0.2 percent last month from November — they will accelerate as the labor market continues to tighten, according to Mohamed El-Erian, a Bloomberg View columnist and an adviser to Munich-based Allianz SE.
“It’s just a matter of time before wage growth picks up,” he told Bloomberg Television’s “In The Loop” program on Jan. 9.
Spending is already strengthening. Households splurged on new cars, appliances, televisions and clothing as spending climbed 0.6 percent in November, double the gain in October, according to figures from the Commerce Department in Washington. Light-vehicle sales totaled 16.5 million in 2014, the most since 2006.
“The economy picked up a nice tailwind at the end of the year,” Bill Fay, group vice president for Toyota Motor Corp.’s U.S. sales arm, said on a Jan. 5 conference call. “This strength will carry the auto industry to a sixth straight year of growth in 2015 with analyst projections ranging as high as 17 million.”
At $11.5 trillion in 2013, U.S. personal consumption expenditures were larger than the gross domestic product of any other country that year, including China, according to statistics from the IMF in Washington. The figures aren’t adjusted to reflect price discrepancies for the same goods in different nations — so-called purchasing power parity — which tends to inflate the output of developing nations where consumers pay less for everything from haircuts to coffee.
Deutsche Bank economists led by David Folkerts-Landau in London forecast U.S. GDP will expand 3.7 percent this year, after climbing 2.5 percent in 2014. The U.S. will contribute close to 18 percent to global growth of 3.6 percent in 2015, compared with 11 percent for all other industrial countries combined, they wrote in a Jan. 9 report.
While the U.S. is gathering strength, the BRIC nations — Brazil, Russia, India and China — are facing tougher times after spending much of the past 15 years basking in the attention of global investors.
Brazil’s debt was downgraded last year for the first time in a decade while Russia is heading into recession, its economy pummeled by the collapse of oil prices and U.S. and European sanctions. Growth in China and India has slowed as both countries grapple with revamping their economies.
“Close the book on emerging markets driving global growth,” Nancy Lazar, co-founder and a partner at Cornerstone Macro LP in New York, wrote in a Jan. 8 report to clients.
Even Jim O’Neill, the former Goldman Sachs Group Inc. chief economist who coined the BRIC acronym, has soured on some of its members, saying in an e-mail that he would be tempted to remove Brazil and Russia from the group if they fail to revive their flagging economies.
“It is tough for the BRIC countries to all repeat their remarkable growth rates” of the first decade of this century, said O’Neill, a Bloomberg View columnist and former chairman of Goldman Sachs Asset Management International.
He argued, though, that even at a slower growth rate, China will add more to the world economy this year than the U.S., when measuring their output on a purchasing power parity basis.
The U.S. has pulled ahead of other industrial nations partly because its policy-making has been better, according to Paul Mortimer-Lee, chief economist for North America at BNP Paribas in New York.
European Central Bank President Mario Draghi and his colleagues are still weighing whether they should buy government bonds to fight off the danger of deflation — a step that the Federal Reserve first took back in 2009.
U.S. budget policy also has been more effective than the euro region’s austerity strategy, which undercut the continent’s economy, Mortimer-Lee added.
Even Alberto Alesina, a long-time proponent of government spending cuts, thinks the euro area should adopt a more expansionary fiscal stance. Alesina, who is a professor at Harvard University in Cambridge, Massachusetts, told the AEA conference on Jan. 5 that he favors more “aggressive” tax cuts by the region’s policy makers.
Japan, meanwhile, managed to throw its economy back into a recession by raising its consumption tax to 8 percent from 5 percent on April 1.
Looking across much of the rest of the world, “the U.S. continues to dominate,” Hubbard said.
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