This is the first post in a series on how a weaker global economy can threaten the recovery that is underway in the US. This post provides an introduction to the series and is followed by three more posts, divided as Parts I, II and III. Part I delves into the drivers of growth in the US and in the rest of the world. Part II explains the basics of an open economy and analyzes the recent rise of the US dollar and the role of the trade balance in the US economy. Part III ties it all together by discussing the importance of demand to the US and global economies.
The US economy has been on a solid path, but may have a hard time keeping up the pace if the rest of the world remains weak. Though the staggering drop in oil prices is a welcome development for growth, the negative factors – lower investment, stagnation in the euro area and Japan, a slowing China, geopolitical events – can offset this boost. The IMF believes so, and has lowered its growth forecasts for every major economy except the United States. US Treasury Secretary Jacob Lew recently acknowledged that the US “cannot do it alone,” despite his claims that US growth is “self-sustaining.”
This introductory post provides of an overview of this series of posts on how a weaker global economy can threaten the recovery that is underway in the US. Following this introduction are three parts that take the discussion further. Part I begins by taking a closer look at how the US economy is getting stronger, how other major economies are not doing so well, and where the risks lie. Part II zooms back out to better understand how an economy is linked to a broader global economy, and the extent to which these links can impact the US economy in particular. Part III then ties it all together to show that it all comes down to the ingredient that has been missing for much of the global economy since the financial crisis – consumer demand.
The bottom line is that the threat of a weak global economy to the US is over the competition for US demand. After all, the US and many major economies, through various fiscal (government) or monetary (central bank) stimuli, have been in a fervent quest to reinvigorate consumer demand and to bring their economies towards the ultimate objective of a virtuous cycle. Such a cycle is one where demand gives rise for more business investment to meet that demand, which in turn generates more employment and income, which then supports even stronger demand. Since early to mid-2014, the sustained rise in the US dollar has reflected a stronger and more stable US economy with increasing consumer demand. With only the US showing signs of momentum while emerging markets face stronger headwinds and most advanced economies remain stagnant, the global quest for demand has the potential to derail the stronger US recovery. The following posts elaborate further:
Introduction: The Global Economy Can Hold the US Back