USA Is Not An Island

USA Is Not An Island

The global economy is slowing, deflation is setting in everywhere. Emerging economies have lost their momentum and are falling into recession, while many advanced economies arent doing much better. Most countries are in too much debt, some are in far, far too much debt, and have no hope of ever repaying it. Among those nations is the US, with a staggering 18 trillion of debt.

There is a narrative emerging which suggests the US will not succumb to the deflationary forces gripping the world, that the US will sustain its growth despite the rest of the world slowing. It is certainly possible to outperform the rest of the world and the US is doing that now, but the US is not an island and its economy is not separate from the rest of the world. If all your trading partners are slowing, its mathematically impossible for you to maintain the same pace of growth.

For instance, Canada is the USs number one trading partner, and Canada is slowing and likely will enter recession in 2015. This fact has caught the attention of Canadian media outlets, and local blogs across Canadas larger cities, like Toronto and Vancouver. Canada doesnt have anywhere near the same size economy as the US does, but Canada buys most of its technology, equipment, and transportation products from the US, not to mention many smaller industries. If Canada slows, these industries will receive fewer orders, and although this alone wont slow the US economy, it will slow these industries, and that detracts from US growth.

This same scenario will play out with nations like Japan, Mexico, China, U.K., Germany, and many others. The more nations that fall into recession, the better chance the US will fall into recession. Already Japan is in and out of recession, depending on the month, Brazil is falling fast, Germany is slowing, Canada as mentioned is slowing, and of course most of the EU is slowing. Organizations like the IMF, BIS, and World Bank are revising their GDP forecasts for 2015, downward.

Focusing on Canada though, over 70% of Canadas exports are purchased by the US, and another 15% or more are bought by China. Both countries report higher than the global average of growth, with China reporting over 7%. Canada is an exporting nation, relying in large part on its resource industries. Canadas GDP growth is below 2%, and has been for years, with the occasional print above 2%. How can a nation grow at below 2% when its major trading partners are growing at 7% and 5% respectively? This suggests that the domestic economy of Canada, that is, the economy minus its exports, must be extremely weak. So weak in fact, that it offsets the 5% and 7% growth handed to it by its trading partners.

Or is there another reason? Government data isnt known for being free of political tampering, and in fact the BLS in particular has been caught red handed manipulating the jobs data. Also, China has possibly the worst record of any nation for reporting economic data. It was well known that local officials would have farmers uproot crops and re-plant them in other fields so they could report greater harvests. China works off of a goal seeking system, where growth isnt measured, its targeted. Officials are responsible to achieve targets, and there isnt much in the way of scrutinizing to prevent fraud.

Conspiracy theories aside, if the US is to maintain a healthy growth rate, it will require its trading partners to pitch in, thats just common sense and good business. This is well reported in many Canadian blogs, especially Vancouver blogs , which tend to focus on US/Canada relations.