One reason for recent volatility in U.S. equity markets — and for remaining uncertainties about the resilience of the U.S. recovery — is a myriad of signs that the rest of the world is sinking economically.
America’s biggest trading partners in every direction face troubles: China is attempting to manage a measured slowdown in growth (from the 10 percent to the 7 percent range); Brazil’s boom has turned sour with lower commodity prices and corruption scandals; Europe’s malaise has not lifted after the recession, with rickety banks and risky government debt levels still unresolved; and Russia faces a host of troubles — from sinking oil prices and economic sanctions, to Olympic debts and a lack of rule of law.
By contrast, the U.S. economy is clearly on a path back to relative health and strength, says economist Paul Ashworth at Capital Economics in Toronto.
“It may sound strange, but the U.S. is the stand-out performer of the G7,” Ashworth says. The G7 includes the U.S. Canada, Germany, Italy, France, the U.K., and Japan. “Everything in the U.S. seems to be going in the right direction — the unemployment rate, the federal budget deficit below 3 percent of GPD.”
And some of what ails the rest of the world, actually juices the American economy, at least in the short run. In an uncertain world, rich foreigners and overseas companies are investing their money in U.S. equities and government bonds, explains Dean Baker at the Center for Economic and Policy Research.
“People buy up U.S. Treasuries because in the scheme of things the U.S. looks relatively safe,” Baker says. “That lowers interest rates, meaning people can refinance their homes, and pay lower rates if they buy a car or get a car loan.”
But there is a flip-side — at least for many U.S.-based businesses — to the United States being the global standout among major developed and developing economies: a strengthening U.S. dollar.
That makes it cheaper for Americans to buy Italian sunglasses, Japanese cars or foreign oil. But U.S. companies that export face more price competition from cheaper foreign-made goods.
And, says investment strategist Anthony Valeri at LPL Financial, U.S. companies may lose significant sales overseas, especially if the eurozone goes into recession again.
“If we do get a slowdown in Europe and in emerging markets, it will impact the profitability of domestic companies,” Valeri says. And that in turn could depress job-creation in the U.S. next year.
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