US Decoupling

By David S. Waddell

The Eurozone, Japan and select emerging markets all seem to be struggling economically with low inflation levels, poor policy responses, and low demand. Meanwhile, the U.S. keeps posting surprisingly strong economic numbers.

Consumer confidence, manufacturing momentum and services strength have converged into an economic growth rate well above 3 percent for the past six months, defying the gravity that seemingly grounds everyone else. Can the U.S. continue to grow it alone?

To answer this question, we must determine how dependent the U.S. economy is on other economies. We can measure interrelationships between economies by examining cross-border flows of goods, services and financial capital. U.S. exports of goods and services account for 13 percent of U.S. GDP, close to an all-time high.

While a slowing world economy should slow export growth, our primary trading partners appear healthy. Canada and Mexico consume nearly a third of U.S. exports, and the IMF projects these countries will grow in 2015 at reasonably brisk rates of 2.4 percent and 3.5 percent, respectively. Europe and Japan, with no growth, account for 25 percent of U.S. exports. Compounding their economic sluggishness, both central banks seem determined to devalue their currencies, thereby reducing purchasing power. If export volumes to those economies fell by a sizable 25 percent, GDP growth would taper by about .75 percent.

The relative value of the U.S. dollar reflects financial flows. As such, the dollar has appreciated over 11 percent against a basket of currencies, year to date. The most important byproduct of a higher dollar is lower oil prices. The reduction in the price of crude and gasoline has added about $125 billion back to corporate and consumer wallets. That’s the equivalent of .75 percent of GDP. Obviously, the producers of oil products domestically will suffer, but the benefits of lower oil prices for the U.S. economy far outweigh the costs.

Bottom Line: The U.S. economy has enough domestic drivers to withstand the ex-U.S. economic malaise. Exports only account for 13 percent of U.S. GDP, and the stimulus from falling oil prices to profits and consumption should more than offset sluggish exports. As weaker economies boost monetary stimulus to further devalue their currencies, a robust U.S. customer could help jumpstart growth offshore. Europe, Japan and the emerging economies rely much more heavily on exports. With their domestic demand moribund, they need to incent foreign demand.

The U.S. may not have decoupled from the rest of the world, but it has faced the post financial crisis issues more assertively, thrusting its recovery well ahead of the pack. Which may be just what the pack needs.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.