Analysis indicates U.S.-led global economy slowing

The U.S. and global economies are slowing, but there is no cause for alarm yet, according to an analysis released today by The Conference Board.

"While it is easy to attribute the slowdown either to Federal Reserve Board rate hikes or to high oil prices, it is likely that both have had rather modest effect up to this point," said Gail D. Fosler, executive vice president and chief economist of The Conference Board. Her analysis appears in StraightTalk, a newsletter designed exclusively for members of The Conference Board's global business network. "The U.S. is still extremely liquid, personal income has been revised up, and the housing market is robust. Few countries have felt it necessary for either exchange rate or domestic reasons to follow the Fed's lead in raising interest rates.

"Eventually, these economic pressures in the U.S. have political consequences in protectionist acts or combative efforts to revalue Asian currencies, neither of which solve the problem and both of which promote global instability," said Fosler.

According to the analysis, the much more important force at work is a massive imbalance in global production and global demand. U.S. domestic demand is solid, growing at a 3.5 percent annual rate, but the system is being overwhelmed by high, sustained growth in imports. The surge in imports is not due solely to oil or textiles, but to rapid growth in almost every product category.

The inability of the U.S. to sustain the current trade deficits is not due to the vulnerability of the U.S. dollar or to a distaste for U.S. financial assets by foreign purchasers. Even the U.S. cannot absorb both its own productive capacity and the rapidly growing excess productive capacity of the rest of the world

"In many ways, Asia and the U.S. are one economy separated by an ocean," said Fosler. "Making this relationship more intense is the fact that Asia has become a relatively large technology producer and the U.S. remains the largest technology producer in the world."

The Conference Board forecast shows Asia slowing in the same moderate fashion as the U.S. There currently is a slowdown in consumer spending, but business investment should continue at almost double-digit rates because of renewed investment in manufacturing and the need to advance IT systems in the services sector. Fosler said it is now a certainty that the growth in U.S. investment this year will be in the high single digits at best.

The wild card for Asia and the world is China. According to the recent first-quarter Gross Domestic Product, growth continued at a 9.5 percent annualized pace, roughly in line with 2004. But recent indicators, such as its industrial value added measure, show Chinese industrial activity is slowing. What is typically reported as industrial production for China is really a measure of value added in the industrial sector, rather than the activity index that most countries report. A value added index combines the rate of unit gain with the change in the mix of higher-value items.

Further evidence of slowing activity in China is the sharp deceleration in Chinese imports, which has eased from about a 40 percent annual rate last year to about 12 percent this year. China has been an especially important market for Japan, which has experienced a slowdown in manufacturing activity, but export orders in Korea and Taiwan are also slowing.

But the Chinese government is remarkably willing to inject new capital into the banking system to offset a crisis. Weaker economic conditions might slow the inflow of foreign investment, but again the Chinese government has a variety of tools, including government spending programs and grants, to cushion the impact.