We Ask: When Will the Pain Go Away?

During the 1990s and the early years of this decade, American industry and shoppers powered the rest of the world. Fast domestic growth, a high dollar, low savings and rising imports made the United States the world's market. Excluding oil, Americans bought $835 billion worth of the world's goods and services in 1995 and $1.7 trillion in 2005. Now the United States has a touch of the flu, and the shopping binge is over. Our import bill (again excluding oil) is flat and may be falling by the end of the year. But while others may sniffle as we sneeze, they probably won't catch cold because others are picking up the slack. China's merchandise imports alone have jumped by $296 billion since 2005 (American imports grew by $283 billion). The European Union's imports from the rest of the world grew even faster. This gives South America, Southeast Asia, Africa, the Middle East, Japan and Korea an alternative to reliance on the United States for growth. So foreigners depend less on us than they did in 1998 or 2003.

Meanwhile, we depend more on foreigners. This year, American farmers, manufacturers and service providers will hit a trio of round-number records: $100 billion in farm exports, $1 trillion in factory exports, $500 billion in services exports. Exports of airplanes, bulldozer parts to India, soybeans and cars to China, medical gear to Brazil and services to Europe are all booming. With our domestic financial sector, real estate, construction and retailing sectors contracting, exports have been America's only source of private-sector growth since mid-2000, and so far have kept the United States out of a deep recession. In fact, for 2008, exports are likely to account for 12.5 percent of GDP—the highest figure in modern times, and likely the highest since John Adams' presidency ended in 1796.

World is more interconnected than ever
Scott Evans, executive vicepresident of TIAA-CREF, a financial services firm for nonprofits

As asset managers we see the world becoming more connected. International trade is now as large as a proportion of world GDP as it's been for a century. Countries in Asia, Latin America and the Middle East are becoming stronger economically and even more interdependent with the developed world than ever before. With the United States looking to these countries for basic manufactured goods and other products, and the rest of the world looking to the United States for sophisticated services and entertainment, we grow more interdependent. Those trends present significant economic and political challenges as well as enormous investment opportunities. At TIAA-CREF, we began investing the pension assets of our 3.4 million customers overseas more than 30 years ago. As global economic integration intensifies, we will continue to look for opportunities for our clients to diversify their portfolios across international boundaries. By participating fully in the international economy, our investors can benefit from new sources of return as well as diversify the risks associated with narrow economic trends in the United States.

Pressure is on for Americans to cut back
Peter Perkins, global strategist of BCA Research

It's important to keep in mind that the world is slowing almost everywhere, including in Europe and China. It's true that there are no signs yet that Europe will succumb to a recession. The German economy is humming along because it produces high-quality machinery geared toward investment and infrastructure development, which have been in strong demand in China, India and the Middle East. But Italy is in recession because it tends to compete against Asian producers, and the strong Euro has hurt them. Spain has slowed because housing construction has gone from boom to bust. China has peaked. Partly that's because Chinese exports to the United States have cooled, but the government has also hiked interest rates and raised reserve requirements to engineer slower growth, downshifting from 11.5 percent growth to 10 percent, with about half the change coming from the loss of exports to the United States. Inflation is above 8 percent, and the government thought that there was overheating in some industrial sectors. China is worried that three or five years down the road they'll end up with gluts. Slowdowns around the world will hurt the United States.

But any reverberations on the United States from a slowing China, for instance, will be swamped by how the U.S. housing market decline and consumer response play out. We don't see any evidence that the United States will rebound materially in the second half of the year. Income growth is slowing, employment is contracting, food and energy prices are eating up an ever rising share of disposable income and you have no savings and declining household wealth.
So far the American consumer has not really cut back—but the pressure is to do so. People thought it was OK not to save when they saw their wealth grow with rising house prices. Now people are thinking: "I don't save any money and my net worth is starting to decline." Initially people are tapped out but eventually they restructure their liabilities so they can begin to save again.

Rebate checks won't have much impact
Nariman Behravesh, chief economist, Global Insight

Any rebound we see from the tax rebates will probably be completely eroded by the rise in gasoline prices. In other words, money given by the U.S government to U.S. consumers will end up in the coffers of governments in Saudi Arabia, Iran and Venezuela, rather than in the hands of U.S. businesses. And once the stimulus from the rebates has run its course, economic growth could be near zero or even slightly negative. Right now, companies that export to emerging markets—which have shrugged off the near-recession in the United States in part because of high commodity prices—are doing well. Aircraft, high-tech, chemicals and other raw materials are all benefiting from the strong growth overseas.