New American Economy Leaves Behind World Consumer of Last Resort – Bloomberg

The rising American economy isn’t
lifting all boats — and may even sink some.

As the U.S. looks set to accelerate, economists from Bank
of America Corp. to Morgan Stanley predict it will provide less
oomph abroad than it once did, partly because of changes wrought
by the financial crisis and recession. The new-look America is
focused on greater demand and production at home and taps more
of its own energy, paring the need to buy overseas in a trend
reflected by the smallest current-account deficit since 1999.

A healthier U.S. even could come at the expense of emerging
markets if it turns into more of a competitor than consumer by
boosting manufacturing. Developing countries also risk being
hurt once the Federal Reserve withdraws its monetary stimulus,
driving their cost of borrowing up and their currencies down
against a resurgent dollar.

“There are signs that U.S. pulling power may not be as
strong as experienced in recent years,” said Gustavo Reis, a
senior international economist at Bank of America in New York.
“If we want to see stronger global growth, we need the U.S. to
grow but others to rebound, too.”

Finance ministers and central bankers will pore over the
outlook this week in Washington at the annual meeting of the
International Monetary Fund. The lender will update tomorrow its
forecasts for worldwide expansion of 3.1 percent this year and
3.8 percent in 2014 after Managing Director Christine Lagarde
said last week that growth “remains subdued.”

Ebbing Influence

One surprising reason for that may be the ebbing influence
of the U.S. even as the median forecasts of economists surveyed
by Bloomberg News point to expansions of 2.7 percent in 2014 and
3 percent in 2015, up from 1.6 percent this year. The government
shutdown may be a near-term hurdle. Another poll suggests it
will shave 0.1 percentage point from growth after one week.

A 1 percentage point pick-up in U.S. gross-domestic-product
growth typically meant a 0.4 point spillover for the rest of the
world, according to Reis. The pulse now may be moving toward 0.3
point, which if reached, would amount to a 25 percent drop in
America’s overseas clout.

If U.S. economic performance does get better in such an
environment, then investors should buy the dollar as the faster
recovery spurs borrowing costs, according to foreign-exchange
strategists at Morgan Stanley and Citigroup Inc. They should
sell emerging-market currencies as capital flows return to the
U.S., imposing higher interest rates and subsequently weaker
activity on the former locomotives of global growth.

Market Rebound

A potential taste of things to come was evident in the
summer, when even the suggestion that the Fed would begin
slowing its $85 billion in monthly asset purchases was enough to
undermine emerging-market bonds and currencies. Those markets
rebounded after the Fed decided Sept. 18 to continue its
quantitative-easing program.

The one-two punch of softer external support and funding
pressures would pose the biggest challenge to Brazil, Turkey,
South Africa, India and Indonesia, strategists at Goldman Sachs
Group Inc. said in a Sept. 5 report. The Czech Republic, South
Korea and Mexico are better positioned to enjoy what U.S.
support there is and have less reason to worry about financing,
they said.

More U.S. demand would mark a change from recent history
when trade partners harnessed a strengthening American economy
and currency to power exports. In the run-up to the 2008
financial turmoil, the U.S. was credited with serving as the
world’s consumer of last resort.

Foreign Impact

That was evident in how American imports of non-petroleum
goods and services rose to about 12 percent of GDP in 2000 from
about 7 percent in 1994 and added a couple more percentage
points more from 2003 to 2007, according to Steven Englander,
Citigroup’s head of Group of 10 currency strategy in New York.
In recent years, imports have flattened at about 14 percent of
GDP, meaning the foreign impact of extra U.S. growth will be
“negligible,” he said.

The U.S. current-account deficit already suggests U.S.
foreign consumption is waning, having narrowed to about 2.5
percent of GDP from almost 6 percent in 2006. The last time it
was so low was 14 years ago.

“There is plenty of reason to think the contribution of
U.S. growth to the rest of the world will be much less than in
previous rebounds,” said Englander, a former Federal Reserve
Bank of New York researcher.

Global Improvement

A faster-growing U.S. still would be favored
internationally over a renewed slowdown, said John Calverley,
head of macroeconomic research at Standard Chartered Plc in
Toronto. A bigger economy would mean Americans buying more goods
from abroad, and recovery-led gains in U.S. equities would
improve financial conditions globally.

“Emerging markets would prefer a rising U.S. market than
one that was weak,” he said.

A study of spillovers published by the IMF last week found
that although economies aren’t correlated as much as they were
during the crisis, the U.S. “still matters most from a global
perspective.” A 1 percent positive surprise in its growth rate
increases output elsewhere by 0.2 percent after two years, twice
the effect of similar accelerations in China and Japan, it said.

One explanation why the U.S. engine may be slowing overseas
is that its share of worldwide GDP shrank to 22 percent this
year from 31 percent in 2000, according to IMF data. In the
meantime other sources of demand have emerged, including China,
which now accounts for 12 percent of global output, up from 4
percent in the same period.

Growth Quality

Bank of America’s Reis argues that the “quality” of U.S.
growth is changing from the consumption-led boom of a decade ago
that aided manufacturers abroad, especially in Asia. While
consumption will edge up 2.5 percent next year compared with 2
percent in 2013, Reis says the driver this time will be an 18
percent jump in spending on homes — good for Canadian lumber
producers but not for many other foreign businesses.

The U.S. also is now less in need of foreign energy thanks
to increased domestic output amid the development of fracking,
which draws on reserves in shale-rock formations. America
churned out an average 7.2 million barrels a day of crude since
the start of January, the highest since about 1991, and Credit
Suisse Group AG estimates the inflation-adjusted petroleum trade
deficit has fallen 54 percent since 2006.

Competitive Industries

Such trends will boost the U.S. trade position by more than
$164 billion in 2020 — a third of the present shortfall — as
the need for energy imports declines and U.S.-based fuel-intensive industries become more competitive, according to a
September study by Lexington, Massachusetts-based IHS Inc. EOG
Resources Inc. (EOG) and Pioneer Natural Resources Co. (PXD) are among the
Texas-based oil explorers whose stocks have soared this year.

The fresh energy supplies also may combine with competitive
labor costs and cash-rich corporate coffers to propel a recovery
in manufacturing within the U.S., leaving the country less
reliant on goods from abroad. A Citigroup report in May
predicted a reversal of the 50-year decline in manufacturing’s
share of GDP, including the creation of 2 million jobs.

Another theme is that U.S. companies are increasingly
repatriating production from China and other emerging markets,
which lured it with cheaper labor costs.

Fifty-four percent of U.S. manufacturers with sales topping
$1 billion are planning to or considering bringing back factory-lines from China, up from 37 percent in February, the Boston
Consulting Group said Sept. 24, citing a survey of 200
executives. It projects that with Chinese wages and benefits
rising 15 percent to 20 percent a year, the cost of operating in
China will be the same as staying in the U.S. by 2015.

Moving Manufacturing

Trellis Earth Products Inc. (TREL), a Portland, Oregon-based
producer of bioplastics, said in July it is moving its
manufacturing operations to New York state from China, investing
$8.3 million and creating almost 200 positions.

“What you see is more companies reshoring and bringing
jobs back,” said Harold Sirkin, a Chicago-based senior partner
at BCG. “Previous headwinds are turning into tailwinds.”

A further challenge for emerging markets is that
reindustrialization means Americans are again finding it
profitable to produce less-sophisticated products such as
fabricated metals and chemicals, said Manoj Pradhan, global
emerging-markets economist at Morgan Stanley. Those are the very
goods that countries like China would have wanted to start
supplying to maintain their development.

Boost Spending

The growth divide could be reinforced once U.S. companies
ramp up capital spending, which Morgan Stanley predicts will
grow 6 percent in each of the next two years, compared with 2.25
percent this year. Such outlays are likely to benefit Germany
and Japan and perhaps specific sectors such as information
technology in India, rather than developing nations as a whole,
he said.

The silver lining is that greater competition
internationally should force governments to take steps to raise
productivity, Pradhan said. The rebalancing of demand around the
world also could be welcomed by the IMF, which has suggested an
over-reliance on the U.S. for growth helped spark the financial
crisis.

“In the long run, this is a win-win,” said London-based
Pradhan. “That’s still a long way away, but good news
nevertheless.”

To contact the reporter on this story:
Simon Kennedy in London at
skennedy4@bloomberg.net

To contact the editor responsible for this story:
Melinda Grenier at
mgrenier1@bloomberg.net

Sept. 27 (Bloomberg) — John Lipsky, former first deputy managing director at the International Monetary Fund, talks about the U.S. economy, Federal Reserve monetary policy and its implications for Asia’s economies.
He spoke yesterday in Singapore with Bloomberg Television’s Haslinda Amin. (Source: Bloomberg)