Slowdowns in Europe and China to Trigger US Recession? – AmericanEconomicAlert.org

In the decades following WWII, there was a saying in Europe: “When the U.S. sneezes, Europe catches a cold.” The meaning was that Europe was so dependent on the performance of the American economy, that any slowdown disproportionately hurt the European economy. Due to years of policy neglect of our manufacturing sector, the modern version of the saying goes, “When Europe catches a cold, the U.S. gets pneumonia.”

The media is currently full of reports that U.S. economic growth will likely be negatively impacted as a result of the slowing economies in crisis-ridden Europe and in China, where growth is still robust but just not at its usual blistering pace. A Marketwatch article this morning details the potential chain reaction, in part buttressed by an April fall-off in American exports to Europe of 11 percent and to China of 14 percent. Consumer and business sentiments are expected to drop when next reported, and manufacturing is likely to show weakening.  The fear is that American consumers, who account for 70 percent of U.S. economic activity, will sense the respective slowdowns in Europe and China, and thus of exports, and will curtail their spending, causing an accelerating negative spiral.

Of course, the decline in exports will hurt American manufacturing, one of the few bright spots in our recovery.  Although there is no doubt that manufacturing has rebounded, the outlook is not as bright as many commentators have suggested with their ‘manufacturing renaissance’ drumbeat.  The ‘onshoring’ of jobs and several factories, i.e., American manufacturers bring back work from foreign locations to U.S. soil, makes for interesting anecdotal stories. And while the president turned Master Lock’s decision to return about 100 jobs from overseas to Milwaukee into a political event, there is no data suggesting a full-blown trend. He also neglected to mention that even with the addition of the hundred jobs, Master Lock’s plant, reportedly running at full capacity with 400 or so employees, is still about 1,000 jobs short of its heyday period.

Increased U.S. exports is a central plank of the “Manufacturing President’s” plan to boost the American economy, along with favorable tax treatment for domestic business and penalties for job offshoring.  Nothing wrong with any of this, but it misses the big picture. However beneficial additional exports are, imports have risen much more dramatically over the past 35 years, swamping any gains from exports.  In their “I’m for jobs and economic growth speeches,” politicians studiously avoid mention of the disturbing fact that U.S. GDP growth has been degraded far more by imports than boosted by exports.

The dependence on foreign markets for a stable U.S. economy only highlights the absence of a cohesive dialogue on a national manufacturing strategy.  The preferred way to grow our economy and cut down on the impact of events beyond our control abroad is to retake a large share of our own domestic market from foreign manufacturers. Elsewhere on this site, you can read my colleague Alan Tonelson’s excellent report on import penetration in 108 leading industrial sectors. The cumulative effects of imports’ inroads have been devastating to America’s ability to generate wealth, create factories and good jobs, advance R&D more robustly, and allow its citizens meaningful work and a high standard of living.

Rather than wringing our hands about whether slowdowns in Europe and China will send the U.S. economy back into recession, we need action to innoculate ourselves by putting into place a comprehensive program to retake domestic market share.  Tackling the 108 industrial sectors in Tonelson’s import penetration report is an excellent place to start, and to ensure we don’t come down with a pneumonia generated overseas.