The New York Times-20080125-Weighty Role on the World Stage
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Weighty Role on the World Stage
Not long ago, many experts were convinced that a vibrant world economy would prevent an American recession. Even if the beleaguered American consumer suddenly turned thrifty, they reasoned, healthy spending on other shores was supposed to keep the expansion rolling.
But now, with the turmoil in financial markets resonating around the world, those same experts see signs that economic growth abroad will probably not be strong enough to prevent the United States from slipping into a recession.
Indeed, the very global interconnections that many thought might spare the United States now appear to be working in reverse: American consumers will pull back from their exuberant spending, cooling demand for goods worldwide, dragging down the global economy. This could in turn stifle foreign demand for American goods.
Exports had been seen as the one strong sector of the American economy, said Alan Ruskin, chief international strategist at RBS Greenwich Capital. Now there's a sense that the American contagion is spreading abroad.
For all the furious economic activity in China and India, the recent upheaval is a reminder that the American consumer remains a central engine of the global economy, the chief appetite for goods and services that has kept factories humming, mines at full production and cargo holds full of products.
But in recent weeks, several signs have emerged suggesting a slowdown throughout the global economy. The price of oil, after spiking at $100 a barrel, has lately pulled back, reflecting an expected dip in demand for energy.
The price of shipping important commodities like coal, iron ore and grain has dropped sharply over the last three weeks, though it still remains high by traditional measures, according to the Baltic Exchange Dry Index, a much-watched gauge of shipping prices that is seen as an indicator of global demand. And in Asia, exporters like Chinese garment companies and Japanese equipment makers are reporting slower demand from the United States.
All of which suggests there still is no substitute for the American consumer. Yes, China and India are developing rapidly, adding millions of newly middle-class people yearning for goods like pillowcases and laptop computers. Latin America and Australia are enjoying a bonanza supplying raw materials to factories from Asia to Eastern Europe. Russia and the Middle East are selling energy at near-record prices, spending the proceeds on the wares of the world.
American companies could surely exploit this growth, the theory ran. Even if consumers at home went into hibernation, buffeted by rising unemployment and the sagging value of real estate, companies could still count on strong sales abroad.
Much of this narrative may still be true, and yet, as stock markets in Shanghai, London and New York plummeted in a bout of panic selling this week, it suddenly seemed an inadequate fix for what ails the economy.
Consumer spending amounts to about 70 percent of the $14 trillion American economy. This stream of money has in recent years brought in a widening basket of imports -- electronics and textiles from Asia; cars and luxury goods from Europe; energy from anywhere it can be found.
American companies have capitalized on this reality. As Korean firms assemble cellphones destined for American shelves, they use chips designed and forged in the United States.
Caterpillar, the construction equipment company based in Peoria, Ill., sells earth movers used to dig out iron ore from the red earth of western Australia, sending it to China to feed smelters. American companies sell oil-drilling gear that is harvesting energy in places like Saudi Arabia and Indonesia.
All of this activity has rested to a considerable degree on the willingness of Americans to buy. Time and again, that force has proven spectacularly resilient. Even as the dot-coms disintegrated and the economy fell into recession seven years ago, American consumers kept spending. Even as housing prices fell and debt levels climbed, Americans continued to head to the mall.
But the latest indicators point to a slowdown in consumption. This, say economists, is predominantly why markets around the world have been recoiling.
Several arteries of wealth that have given consumers the wherewithal to spend are rapidly drying up. During the years of the real estate boom, Americans pulled more than $800 billion a year out of their homes through refinanced mortgages, home sales and home equity lines of credit. Falling housing prices have drastically shrunk that pool. A slowing job market has deprived spenders of the means to buy.
Now, fresh data shows that Americans have been tapping their credit cards aggressively, while increasingly falling behind on the payments.
As they use up their available credit, they have no other source of spending, said Ellen Zentner, United States macro-economist at Bank of Tokyo-Mitsubishi in New York. Credit cards are their funding of last resort.
From the end of 2005 through the fall of 2007, the share of consumer credit card debt that was delinquent ticked up to 4.3 percent, from about 3.5 percent, according to data from the Federal Reserve. From the beginning of 2006 through the end of last year, growth in the use of consumer credit cards surged to 7.4 percent, from 2.6 percent in annualized terms.
Other credit available to consumers has been shrinking sharply, according to an analysis by Ms. Zentner. The pool of unused credit -- predominantly home equity lines of borrowing, bank loans and credit cards -- was still growing at nearly 15 percent annually as recently as the fall of 2006. Now, with debt mounting, home prices falling and job growth slowing, that pool is diminishing at an 8 percent annual rate.
At the consumer level, this situation really is untenable, said Robert J. Barbera, chief economist at the research firm ITG. We've gone from equity extractions to credit cards to where now consumers are actually going to have change the trajectory of their spending.
If thoughts of a newfound American thrift helped scare world markets this week, so did continuing worries about the extent of losses facing banks as the mortgage crisis spreads. Here, too, what was once seen as the moderating force of global connectedness has gone malignant.
Back when house prices were going up and banks were aggressively writing mortgages, they spread their risks by selling their loans to investors around the globe. That was once a source of comfort; now, it means the losses could be hiding in any banking balance sheet in any country.
There's so much uncertainty about where the risks lie, Ms. Zentner said. It smacks too closely of another Asian financial crisis when you get rumors of big write-downs by a Chinese bank.
The story fed into larger fears that banks worldwide would be reluctant to lend, choking economic growth, even with sharply lower interest rates delivered by the Federal Reserve. If nobody can calculate with confidence how big the mortgage losses will be, then no one really knows how much cash they must reserve against bad loans. No one can tell whether business prospects will keep souring, making banks cautious with their funds.
The real fear is that there's a kind of total systems meltdown, said Michael Darda, chief economist at MKM Partners. There's a real sense that we just deteriorate from here and fall deeper and deeper into the abyss.
From Mr. Darda's perspective, the fear has become the poison itself: he thinks markets worldwide have severely overreacted to the downturn in the United States, pointing to declines in new claims for unemployment insurance inarguing that the job market is healthier than many believe.
New jobs, he says, will be more important than credit cards or home loans. If so, it could prove comforting. But it means the global economy still rests on the back of the American consumer.
[Illustration]PHOTO: Housing prices are falling and debt levels are climbing, but Americans still head to stores, like these shoppers in San Francisco.(PHOTOGRAPH BY MARCIO JOSE SANCHEZ/ASSOCIATED PRESS)(pg. C4)DRAWING (pg. C1)