The world’s main growth engine, the US, is slowing. That is the verdict from the labour market, with job growth in the past four months running 35 percent below average since early 2004. It is the verdict from the housing market, where an emerging downturn in residential construction activity is knocking at least 1 percentage point off the GDP growth trend of the past three years. And notwithstanding July’s temporary bounce-back in retail sales, it is a message from the consumer, whose inflation-adjusted spending growth fell to 2.5 percent in the spring period – one percentage point below the heady trend of the past decade.
America’s slowdown represents an important transition in the sources of economic growth, away from the vigorous wealth creation of asset bubbles – first equities, then housing – and back towards more subdued labour income generation. The delayed impact of higher interest rates is also taking a toll. Even though the Federal Reserve has put its two-year monetary tightening campaign on hold, there is a risk it has already gone too far. The confluence of higher energy prices, rising debt-servicing burdens, and negative personal saving rates reinforces the possibility of a pullback in discretionary US consumption and GDP growth.
This is an equally critical transition for the global economy. The world is about to lose significant support from the key driving force on the demand side of the equation – the American consumer. In a post-bubble climate, US households will be unable to save through asset appreciation, prompting America to increase income-based saving and reduce its claim on the pool of global saving. That points to a long-awaited reduction in the big US current account deficit – initially painful for export-dependent economies elsewhere in the world but ultimately a welcome resolution for global imbalances.
But who ill fill the void as the US consumer pulls back? The simple answer is; maybe no one...
I'll take Roach until after the elections...
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