NY Times, August 24, 2008
U.S. and Global Economies Slipping in Unison
By PETER S. GOODMAN
Economic trouble has spread far beyond the United States to major
countries in Europe and Asia, threatening American businesses with
the loss of foreign sales and investment that have become
increasingly vital to their sustenance.
Only a few months ago, some economists still offered hope that robust
expansion could continue in much of the world even as the United
States slowed. Foreign investment was expected to keep replenishing
American banks still bleeding from their disastrous bets on real
estate and to provide money for companies looking to expand. Overseas
demand for American goods and services was supposed to continue
compensating for waning demand in the States.
Now, high energy prices, financial systems crippled by fear, and the
decline of trading partners have combined to choke growth in many
major economies. The International Monetary Fund expects global
growth to slow significantly through the end of this year, dipping to
4.1 percent from 5 percent in 2007.
"The global economy is in a tough spot, caught between sharply
slowing demand in many advanced economies and rising inflation
everywhere," the I.M.F. declared last month in its official World
Economic Outlook.
All this means that economic troubles in the United States could
intensify into the presidential election season and beyond. It could
also make it harder for financial companies like Lehman Brothers
which has been seeking fresh investment in South Korea and the
government-backed mortgage giants Fannie Mae and Freddie Mac to
attract much-needed capital from abroad.
As the United States and many other large economies slip in unison,
the reality of integrated markets is being underscored: just as
globalization spreads prosperity linking cotton farmers in Texas to
textile mills in China the same forces spread hurt when times go bad.
"The slowdown has reached such a wide range of countries that they're
now feeding on one another," said Alan Ruskin, chief international
strategist at RBS Greenwich Capital.
The impact of the downturn is reflected by the experience of the
Vermeer Corporation in Pella, Iowa. The company, which manufactures
farming and construction equipment, has become accustomed to looking
abroad for growth as the real estate bust in the United States has
crimped purchases of its gear by American home builders. Its overseas
sales have doubled in the last five years as a percentage of its
total business and now make up nearly a third of its revenue, the
company's senior director of international sales, Steve Heap, said.
But in recent months, even as growth has continued over all, some
parts of the world have sunk into malaise.
"The U.K. has been really soft for the last six months," Mr. Heap
said. "Western Europe overall has been flat. We've not seen the
growth we've seen in the last few years."
Many other major economies are either stagnant or shrinking as well.
Japan, whose fortunes are tethered to exports, saw its economy
contract at a 2.4 percent annual rate from April through June after
accounting for inflation. Germany, another export power, slid at a 2
percent clip. France and Italy slipped slightly.
Spain and the United Kingdom both grappling with hangovers from
their own real estate binges were both flat amid talk that they
have already slipped into recession. The festivity of easy money has
given way to recriminations over bad loans, unemployment and inflation.
"The year 2009 in Europe is going to look significantly worse than
2008," said Marco Annunziata, chief economist at the Italian bank UniCredit.
Even China and India, whose swift growth has occasioned talk of a new
global order, have been cooling in recent months, though still
expanding at rates that would bring envy in nearly any other land.
"We had buoyant world growth for a few years," said William R. Cline,
a senior fellow at the Peterson Institute for International Economics
in Washington. "It was too hot not to cool down, as the song goes."
There is a potentially significant upside to the downturn under way:
it could knock down rising prices for food and energy, which have
been driven higher by swelling demand in a swiftly expanding world economy.
The chairman of the Federal Reserve, Ben S. Bernanke, has been
betting on that very scenario as he has rejected calls for higher
interest rates to suffocate inflation.
The recent drop in commodity prices, combined with "a pace of growth
that is likely to fall short of potential for a time, should lead
inflation to moderate later this year and next year," Mr. Bernanke
said Friday at the Fed's annual economic symposium in Jackson Hole, Wyo.
Still, concern centers on the possibility that slowing global growth
could hurt sales of American goods and services overseas. Exports
have been a conspicuous bright spot in an economy colored by falling
home prices and declining consumer spending.
The dollar has been strengthening against many currencies in recent
weeks not because of a newfound belief in American prospects,
economists say, but because investors are edging out of markets that
are weakening, like Britain and other parts of Europe, sending down
the pound and the euro.
"It's the rest of the world going down, not the United States going
up," said Kenneth S. Rogoff, a former chief economist at the
International Monetary Fund and now a professor at Harvard.
A stronger dollar makes American goods more expensive on world
markets. If the dollar keeps strengthening, it could pinch sales.
"Exports have been sort of holding us out of the graveyard," said
Martin N. Baily, a former chairman of the Council of Economic
Advisers in the Clinton administration, and now a senior fellow at
the Brookings Institution in Washington. "That may begin to peter out
a little bit if the dollar continues to climb."
Some economists argue that the dollar's recent strengthening is a
correction after six years of declines that have sapped it of
one-fourth of its value against the currencies of major trading
partners. Others maintain that the dollar has further to fall, noting
that the United States remains on the short of end of a lopsided
balance of trade, with imports outstripping exports by nearly $800
billion at the end of last year.
Regardless of the dollar's value, sales of American goods may be
eroded by a more decisive force: a global loss of appetite for goods.
"If the rest of the world economy slows, the demand just isn't going
to be there," Mr. Ruskin said.
That could be painful for American companies that rely on overseas
markets. In 2001, large American companies that disclosed foreign
revenues logged about a third of their sales abroad, according to an
analysis by Howard Silverblatt, senior index analyst at Standard &
Poor's. By last year, the foreign take had climbed to 46 percent.
Europe made up 29 percent of the total.
Some American businesses say it is too early to worry about a global downturn.
"When I see the headlines, I worry, but when I look at my order book,
I stop worrying," said James W. Griffith, president and chief
executive of the Timken Company, a Canton, Ohio, manufacturer of
industrial bearings and power transmission equipment with operations
in 27 countries.
Roughly half of Timken's bearing business is overseas, cushioning the
company against the loss of sales in the American auto industry a
trend Mr. Griffith says he is confident will continue.
"When China decides they want to build a car, somebody runs a steel
mill with coal and iron ore out of Australia, and they mine it with
Caterpillar dump trucks which are full of Timken bearings," Mr.
Griffith said. "What is driving our success is the globalization of markets."
Still, the transformation of foreign shores from a refuge for
American business into a source of anxiety is a testament to how
swiftly trouble can proliferate in the global economy.
India's customer service call centers heavily dependent on American
demand are now girding for cuts.
In China, the pace of growth has dipped from an annual rate exceeding
12 percent as recently as last year to something closer to 9 or 10
percent, according to most economists.
China's leaders have become concerned about flagging exports,
recently altering priorities from seeking to squelch inflation to
instead sustaining economic growth. The government is easing
restrictions on bank lending, which were imposed to put the brakes on
the economy.
When China makes fewer computers, it needs fewer computer chips
forged in Taiwan and designed in the United States. It needs less
steel, and so less iron ore from Brazil and Australia. Which means
those countries need less construction equipment made in Germany,
Japan or Ohio.
"The global slowdown is going to create some headwind for the United
States," said Stephen Jen, an economist at Morgan Stanley in London.
Keith Bradsher, Carter Dougherty and Heather Timmons contributed reporting.
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