Now, world buoys U.S. economy

Rising demand for US exports has offset the domestic downturn in home-building.

from the December 18, 2007 edition

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In some cases, the funding can come from controversial "sovereign wealth funds" owned by foreign governments. But at a time when many US banks are struggling to raise capital, the biggest – Citigroup – recently welcomed an influx of cash from one of those funds, the Abu Dhabi Investment Authority.

These gains don't wipe away the significant challenges facing the US economy. Nor do they mean that the rest of the world is on an unstoppable roll.

The risk of a US recession remains high. Some economists believe such a contraction in economic activity is already under way, or will be early in 2008.

Europe and Japan, two other global heavyweights, are seeing some signs of slower growth. And the rest of the world is vulnerable to the negative effects of a US slump.

"The places that have good momentum are probably also the places that would be hurt by a US slowdown," says Jay Bryson, an economist at Wachovia Corp., a bank and investment firm based in Charlotte, N.C. That includes trading partners in Asia and Latin America.

Moreover, windfalls of investment from oil-rich nations in the Middle East are, to some extent, just the flip side of higher oil prices that have hit US consumers.

Still, there are more than a few grains of truth to the story about solid global growth – and the lift that gives to America. Perhaps the most significant factor is that developing nations are growing robustly – with fortunes tied to more than just exports to US consumers. These nations are selling to one another, and to their own domestic consumers, more than ever before. And they have more cash on hand for emergencies.

Joseph Quinlan, chief strategist at Bank of America's Investment Strategies Group in New York, says that rising personal consumption in developing nations is as powerful as any force in the global economy now. "It isn't just Asia," he says. "It's Central Europe. It's the Middle East. It's Latin America."

That, he says, should mean that even as the global economy cools somewhat in 2008, it will still grow a bit above its long-term average of 3.7 percent a year. And that helps the US, too.

"I think it will carry us through," without a recession, Mr. Quinlan says.

In 2000, by his research, the US accounted for nearly 19 percent of all imports worldwide. Today, thanks to emerging-nation growth, that percentage has fallen to 14 percent – a level not seen since the early 1990s.

That's part of the reason behind a shrinking in the US trade deficit, in numbers released by the US Commerce Department Monday.

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