Thursday, January 10, 2008

Globalization Makes US Economy Recession-Proof?

The chart above (click to enlarge) shows annual world real GDP growth from 1980 to 2008 (IMF estimates growth of 4.8% for 2008), using data from the IMF, along with shaded areas of years during which the U.S. economy was in a recession. During the last four U.S. recessions (1980, 1982, 1990-91, and 2002), world GDP growth fell below 3%, and averaged only 2.1%.

Assuming that world GDP grows at the IMF's forecast of 4.8%, it would either be: a) inconceivable that the U.S. economy could go into a recession with such strong growth in the rest of the world, or at least b) unprecedented that we could suffer a recession while the world economy continues to grow at almost 5%.

I think it is worth considering that in previous U.S. recessions like in 1980, 1982 and 1990-91, there was no, little, or at least much less support from the global economy and emerging markets like there is today. For example, during those recessions, there was no support for the U.S. economy from countries like India, Brazil and China like there is today. And even compared to 2001, the world economy today is much stronger, more integrated, growing much faster; and the strong growth in the emerging markets is providing much more support for the U.S. economy than ever before.

Perhaps the dynamics of the U.S. business cycle are different now because of globalization, increased integration of world markets, and the unprecedented growth of emerging markets like the BRIC countries. Is it possible that globalization has made the U.S. economy recession-proof? At the very least, it's something to think about, and I don't think it has received much attention.


At 1/10/2008 12:26 PM, Anonymous Anonymous said...

thanks for the great graphic. i enjoy your blog. tho i rarely agree with you, i always like to hear the other side of the story.

i'm very curious about how the slowdown in the US will play out globally. i guess my outlook is less sunny than yours.

first of all, isn't GDP a coincident indicator? what predictive value does it have?

the emerging markets sell a lot of product to the us (and europe). i can't see how a slowdown in orders won't impact them. for a hint about the future of global business, check out the stock charts for global shippers DRYS and DSX.

At 1/10/2008 1:41 PM, Anonymous Anonymous said...

Assuming that world GDP grows at the IMF's forecast of 4.8%, it would either be: a) inconceivable that the U.S. economy could go into a recession

You keep using that word. I do not think it means what you think it means.
-Inigo Montoya

Sorry Mark! I couldn't resist.

At 1/10/2008 1:42 PM, Blogger Colin said...

I have had similar thoughts. I'm not sure we are at the point yet where the US economy is "recession proof" but I think that we will see recessions become less frequent, shallower and shorter-lived than in the past. My sense is that for the economy to be truly recession proof that we need India, China, etc. to become a lot richer and growth to extend to more countries (a booming Mexico and Latin America would be huge I imagine).

And while globalization has taken place at a phenomenal rate it seems that the overwhelming majority of U.S. economic activity takes place between Americans and other Americans.

At 1/10/2008 2:51 PM, Anonymous Anonymous said...

Good point. Regarding changes in the structure of the economy that would affect the relationship, it's already happened. In the 1950s and '60s, the share of exports in GDP was about five percent. Now it's over ten percent, with much of the gain in the 1980s and '90s.

Our weak sector now is residential construction, which in the 50s and 60s was on a par with exports; now exports are over twice as big in dollar value as res construction.

The global economy does not guarantee that the U.S. won't go into a recession, but it's a mighty positive force.

At 1/10/2008 7:14 PM, Anonymous Anonymous said...

Umm, Tony C, wasn't that Vizzini? That movie forever defined "inconceivable" for me.

At 1/10/2008 7:17 PM, Anonymous Anonymous said...

It was said TO vizzini

At 1/10/2008 9:29 PM, Anonymous Anonymous said...

Ah! I misread your post.

At 1/11/2008 2:18 AM, Anonymous Anonymous said...

I used to work in the insurance business at a low level. They said that when that blue insurer got the sniffles, everyone else got a cold. Sounds like us, if our spending goes down, it's going to kill the primitive economies.

At 1/11/2008 10:35 AM, Anonymous Anonymous said...

We've seen this party before. It's called 1974 when the world last had as long a stretch of global growth. The only problem is we had a sharp economic slowdown and the worst stock market since the Great Depression.


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