The global economy is in peril. China's growth miracle is unravelling. The world's financial markets are vibrating like a high-pitched tuning fork being hit by a hammer.
Yet in the midst of all this doom and gloom comes a timely reminder that the biggest economy in the world, the United States, is doing just fine, thank you very much. July durable goods orders – an important indicator of manufacturing strength, business capital investment and big-ticket consumer demand – rose a better-than-expected 2 per cent month over month, adding to a upwardly revised 4.1-per-cent surge in June. It was the best two-month stretch in nearly a year.
And importantly, the numbers suggest that business investment in machinery and equipment, a key engine for economic growth, has shifted into a higher gear after stalling earlier in the year.
The strength in durable goods now has economists thinking that the U.S. second-quarter gross domestic product growth estimate will be raised to an annual rate of more than 3 per cent, from the initially reported 2.3 per cent, when the U.S. Commerce Department releases its revised numbers on Thursday. (By comparison, Canada's economy is believed to have contracted slightly in the same quarter.) The numbers also bode well for continued growth momentum in the third quarter.
The question is whether that momentum can be sustained, even as key elements of the economy in the rest of the world are crumbling. In an increasingly integrated global economy, can a single country – even one as economically powerful as the United States – go it alone, and even carry the rest of the world, on its broad shoulders?
To that end, it's notable that the U.S. economy, despite its heft and deep global influence, is remarkably self-contained. Exports of goods and services make up less than 14 per cent of its GDP, the least of any major industrialized country. By comparison, Canada relies on exports for 32 per cent of its GDP; China for 23 per cent; Britain for 28 per cent; Germany for 46 per cent. Much more than most of the world's big economies, the United States relies on its considerable domestic demand to drive its growth. As such, the U.S. economy looks uniquely well-insulated from a slump in China, which accounts for a modest 7 per cent of U.S. exports.
Indeed, the country's notoriously voracious consumers provide the U.S. with ample homemade demand, particularly given the current strong U.S. employment growth and low interest rates. The U.S. Conference Board consumer confidence index, released earlier this week, is near an eight-year high.
Whether this U.S. self-generated demand will be enough to lift the rest of world out of its persistent economic funk is a tough question; particularly for countries with close geographic and trade ties to China, the answer may be no. But speaking selfishly, it may be enough to lift Canada. About 14 per cent of all imported goods to the U.S. come from Canada, making this country the single biggest source of imports into the United States. And the U.S. market gobbles up a massive three-quarters of Canada's exports. The capacity for the U.S. to fuel growth from within is, clearly, critical to Canada's own economic prospects.
But while the U.S. economy may be something of an island, it shares the same financial-market seas with the rest of the world, and the same angry waves are lapping up against its shores. Worries about China wiped out more than 10 per cent of the value in the U.S. stock market in just over a week, and that's no small thing for a country highly invested in capital markets. It has sent tremors through currency and bond markets and raised talk of a renewed round of global disinflation.
The U.S. dollar and markets will not be able to separate themselves from the global impact of these issues nearly so easily, and these all pose a risk to the U.S. economy. Perhaps most importantly right now, a major bear market could sap U.S. household wealth and undermine consumer confidence, not to mention the potential damage to business investment. The home-grown U.S. economic resurgence would be hit at its core.
This will, certainly, be a hot topic at the big annual Jackson Hole economic symposium, which begins Thursday in the Wyoming mountain resort. The event typically draws a who's who of the world's central bankers, and provides a lively forum for discussions on key monetary policy issues, both in formal sessions and informally throughout the corridors. (The guest list won't be made public until Thursday evening, but buzz is that Bank of Canada Governor Stephen Poloz plans to attend, as he has in the past.)
Conspicuously absent from this year's gathering, however, will be Federal Reserve chair Janet Yellen. The Fed announced months ago that she would skip the event, which comes just weeks before a key Fed policy meeting at which it will consider its first post-recession interest rate increase – a decision that has become severely muddied by the uncertainties surrounding China and the markets. Her absence will be deeply felt.
At a moment when the global economy is looking with pleading eyes to the U.S., the critical voice on the U.S. outlook and its policy leanings will not be heard.
David Parkinson