After a wild week of swings, it appears U.S. equity markets are having a cool down, not a meltdown. And while data and events suggest more world turbulence ahead, U.S. economic fundamentals look relatively better than most other economies and may actually be strengthening.
But what’s been made clear once again during the market’s recent rocky ride is that the U.S. economy is not an island. Globalization makes it vulnerable to the vagaries of worldwide policies and events. With that in mind, policymakers should better prepare for a future financial shock, even if some safeguards have already been implemented to reduce the chances of a repeat of 2008. And the best method to prepare for any acute global slowdown remains getting America’s fiscal house in order.
China’s slowing economy and declining equity markets have been the focus, although not the only cause, of global gloom. But it should be noted that the steep declines came after even bigger increases in previous months. Given the scale of China’s economy, and the overall global slowdown, many nations dependent on commodity exports will be deeply affected. This is especially true for already-reeling oil-exporting countries. Lower oil prices should benefit some developed economies, especially in Western Europe and Japan. But deeply rooted fiscal issues in Europe, including but not limited to Greece, are likely to keep those economies sclerotic.
The economic news is better in the U.S., however. On Thursday, second-quarter growth in gross domestic product was revised upward from 2.3 percent to 3.7 percent. Some of the jump was due to an increase in inventories, suggesting that the third quarter may not be as robust. On Friday, the Commerce Department reported that consumer spending had increased a modest 0.3 percent. Overall, “the American economy is much more flexible, very large, with highly developed institutions that work better than institutions that govern the economy in other parts of the world,” said Robert Kudrle, a professor at the University of Minnesota’s Humphrey School of Public Affairs.
Whether the data and developments overseas delay a well-telegraphed rise in U.S. interest rates this fall remains to be seen. More certain is that this nation is on an unsustainable fiscal path, despite relatively good news released from the Congressional Budget Office (CBO) on Tuesday. The continuing economic recovery means that the budget deficit is likely to fall by about $60 billion this fiscal year. However, the CBO warned that an aging population and rising health care costs will lead to growing deficits — and more debt — if lawmakers don’t act. “If this debt continues to grow, it handcuffs the government if we go into another recession,” CBO Director Keith Hall said in releasing the report.
Unlocking those handcuffs is advisable, but it will take political courage from current officeholders and those seeking the presidency. To date, there has been little campaign focus on fiscal issues. This is an opportune time to begin that debate.