After a long, slow convalescence from the Great Recession, the U.S. economy has emerged this year as a major force for global growth for the first time in a decade, even as some of its top rivals struggle.
Despite the sudden loss of confidence on Wall Street last week, the U.S. economy shows little sign of faltering and its solid footing helped nurture a quick recovery in stocks.
Economists point out that U.S. growth took off in the spring quarter with a 4.5 percent rebound from a winter slump and is expected to continue at a healthy 3 percent clip in the second half of the year. That far surpasses the growth rates in Europe and even bests the sluggish growth of formerly robust emerging economies such as Brazil and Russia.
Perhaps more important, the U.S. jobs machine got back into action this year, churning out a string of job gains averaging well over 200,000 a month in what looks to be the best year for job growth since the 1990s.
About the only major factor holding back the economy is wage stagnation, but many economists are optimistic that the renewed momentum will prompt employers to start goosing paychecks to attract and keep increasingly scarce talent. Despite flat wages, workers are enjoying a hefty increase in purchasing power thanks to low inflation and plunging prices at the gas pump.
“The U.S. economy — the world’s largest — is the locomotive of global growth for the first time since the Great Recession,” said Nariman Behravesh, chief economist at IHS Global Insight.
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U.S. consumers and businesses seem to be gaining confidence, shaking off the lingering effects of the global crisis and moving into a period of more normal, healthy expansion while many of the rest of the world economies are sinking or even flirting with recession, he said. The Ebola outbreak has raised concerns about West Africa, where the outbreak is centered, but economists say it poses little danger to the U.S. economy unless it turns into a full-scale global epidemic.
“The U.S. economy is on solid footing while the rest of the world is struggling,” Mr. Behravesh said. Even China, the world’s main engine of growth during the recession, is wrestling with decelerating growth and a crash in its bloated real estate sector.
“The pendulum seems to have swung back from an environment in which just five years ago emerging markets were the darlings of the global economy,” Mr. Behravesh said. “While the locomotive role of the U.S. is less powerful than it was a couple of decades ago, it has regained its role as possibly the major driver of global growth” today.
The strong showing by the U.S. economy has sent the U.S. dollar surging against the euro, Japanese yen and other major currencies, which helps boost the purchasing power of American consumers while nurturing growth among trading partners by making their exports cheaper and more attractive to buyers in the U.S.
Greasing growth
Another factor boosting U.S. and global growth is the oil and gas boom caused by breakthroughs in shale drilling in the nation’s midsection.
The shale revolution this year has exerted a powerful influence over world energy prices, creating a flood of supplies that has helped send oil prices plunging back to 2012 levels despite major geopolitical tensions in the Middle East, Russia and North Africa.
“Low oil prices are great for consumers,” said Evan Kelly, editor at OilPrice.com. “They act as a tax cut — more money in people’s pockets can have a material effect on purchasing power, and can provide a modest boost to consumer economies.”
Added Mr. Behravesh: “The energy boom is stimulating growth at home and serving to attract investment and manufacturing jobs back to the U.S.,” while bringing “significant benefits to the rest of the world.”
The steep drop in premium crude prices from well over $100 a barrel this summer to close to $80 recently is “providing an important boost to oil-consuming countries around the world,” he said.
Average gasoline prices in the U.S. plunged to the lowest levels of the year last week, averaging $3.19 a gallon for regular blends, the AAA reported.
The sharp drop in pump prices is one reason economists are increasingly confident about the U.S. economy because it is an area where consumers are particularly sensitive to fluctuations.
At a time when wages are barely keeping up with inflation, a drop in gas prices is one of the few ways that consumers can get an effective increase in disposable incomes. Morgan Stanley estimates the increase in disposable funds at $40 billion a year.
But there is a downside to plummeting oil and gas prices. Premium oil prices fell last week to below $82 a barrel, perilously close to levels that make it uneconomic for drillers in high-cost shale operations to keep pumping oil and gas.
“The current oil price slump may benefit the economy but could hurt one of the main pillars of economic growth, namely the main actor responsible for the global oil production increase,” said commodities trader Zoltan Ban.
Even when prices were around $100 a barrel, many drillers were barely keeping their heads above water, in part because they took on debt to finance the high costs of setting up shale drilling operations, he said. Chesapeake Energy Corp., the leading shale oil developer, for example, carries $12 billion in debt.
“Lower oil prices could lead to the shale oil bubble bursting,” an event that would force many debt-laden shale drillers to abandon their projects and file for bankruptcy, he said.
Weight of the world
The growth slowdown in the rest of the world also poses risks for the U.S. economy, especially the renewed downturn in the European Union, which is the largest U.S. trading partner. Germany, the Continent’s largest economy, last week slashed its growth estimates through the end of 2015. Federal Reserve officials have voiced worries that flagging economies overseas might drag down U.S. growth, and that concern also contributed to the sell-off in U.S. and world stock markets in the past week.
David Donabedian, chief investment officer at Atlantic Trust Private Wealth Management, said whether the U.S. economy holds up under pressure from declining economies overseas is the biggest question for global stock markets.
“While Europe flirts with recession, Japan stalls, and China slows, the U.S. expansion has actually broadened and deepened,” he said. “Will the U.S. remain an island of prosperity?”
But Tom Porcelli, chief U.S. economist at RBC Capital Markets, said investors are worrying too much about the risks facing the U.S.
Trade with Europe constitutes only about 3 percent of U.S. economic output — a small slice of America’s $17 trillion economy.
“The correlation between Eurozone and U.S. growth has been very weak over the course of the last 3 years,” he said.
• Patrice Hill can be reached at phill@washingtontimes.com.
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