The Wall Street Journal-20080122-Ahead of the Tape
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Ahead of the Tape
Will Economy
Lose Support
From Abroad?
As the economy reels from the busted housing bubble, questions loom about whether overseas investors' hunger for U.S. assets will weaken.
For years, the U.S. has run a steep trade deficit with the rest of the world. The so-called current-account balance, broadly speaking, measures the difference between goods and services imported and exported.
The scale has lurched toward the import side of the equation for the U.S., which means the country has been consuming more than it has been saving. Foreign purchases of U.S. assets such as Treasurys have helped finance that spending. This imbalance has inspired all sorts of doomsday forecasts about economic meltdowns and foreign investors dumping dollars and Treasury bonds.
If such scenarios have any merit, today's economic turmoil could test them.
Economists have wrangled for years about what created the current- account deficit -- a spendthrift U.S. consumer and government are favored targets, with productivity and out-of-kilter currency-exchange rates thrown in. Economists love even more to speculate about what could turn it around.
Some unwinding already has taken place. After expanding for more than a decade, the current-account balance started narrowing about two years ago. The deficit contracted to 5.1% of gross domestic product in last year's third quarter, from the record 6.8% in the fourth quarter of 2005.
Credit the weak dollar, which helped raise demand for U.S. goods and services overseas, and made imports more costly. The deficit needs to contract further to restore harmony to global trade. Consumer spending could be the next domino to fall.
As the disappointing holiday sales season showed, the American consumer isn't in fine fettle. Trouble is, consumer spending is the backbone of the U.S. economy, representing about 70% of output. If Americans tighten their belts too much, it could trigger a recession that spreads overseas. The result: a vicious cycle in which foreign spending on U.S. goods falls, making the recession even deeper. If overseas investors get too jumpy about the U.S. economy, their appetite for U.S. assets could dwindle.
Some think consumers in fast-growing countries such as China and India can offset a U.S. slowdown. Morgan Stanley's Stephen Roach says it is folly to believe a recession in the U.S. won't ruffle foreign feathers. He estimates that American consumers spent $9.5 trillion in 2007, compared with $1 trillion in China and $650 billion in India.
For now, foreign investors don't seem to be tiring of U.S. assets. The Treasury Department said last week that net foreign-capital inflows into the U.S. in November rose to the highest level in nearly two years. Government investment funds, also known as sovereign wealth funds, are tripping over themselves to snap up stakes in beleaguered American financials.
Still, there is little question that the American consumer is cutting back. Few know for certain how the process will play out, which is one reason investors are so jittery these days.
"The big macro issue for this decade is what the U.S. current- account adjustment will look like," says Lou Crandall, chief economist at Wrightson ICAP. "Any adjustment will require an adjustment in consumer spending, the question is will it be orderly?"
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