Writing at The Wall Street Journal Ruchir Sharma of Morgan Stanley makes what is to me a rather tepid argument that we’re much more exposed to a global economic downturn than we were in 1997-1998 when the U. S. economy continued to perk along nicely despite the Asian financial crisis:
The first signs of U.S. weakness emerged in manufacturing, which is deeply influenced by the global economy. Though manufacturing represents a shrinking share of the U.S. economy, now 12% of GDP, it is still a leading indicator, in part because of the outsize role it plays in the financial markets. Manufacturing industries account for some 60% of profits among companies on the S&P 500, which are increasingly reliant on foreign sales. In this decade, American companies have earned 27% of their profits overseas, compared with 17% in the 1990s. By the second half of last year, surveys of manufacturing had started signaling a significant slowdown, with one suggesting a possible contraction.
In 1998 manufacturing and export weakness was offset in the U.S. by falling oil prices, declining interest rates and surging consumer demand. But here too much has changed. In the past, Americans spent virtually all of the windfall from falling oil prices, boosting the economy. This time they are saving 40% of the windfall, perhaps still unnerved by the 2008 crisis.
Since 1998 the U.S. has also emerged as the world’s largest oil producer. The shale energy boom has increased oil production from eight million barrels a day to 12 million. Though America is still a net importer of crude oil, it has become a net exporter of petroleum products, and investment in energy has been hit hard by the sudden drop in oil prices. When oil prices rallied a bit to $60 a barrel in mid-2015, markets expected the price to stabilize. Then it dropped again, driven in part by falling demand in China, to just above $30.
The reason it strikes me as it does is his persistence in conflating overall numbers with numbers dependent on trade. For example, that 12% of GDP is now manufacturing does not mean that 12% is dependent on global trade. Presumably, it’s some smaller percentage, possibly a much smaller percentage. If he’s saying that our manufacturing isn’t manufacturing any more but just repackaging things that were actually manufactured somewhere else, he should say that.
It’s the same with all of the other measures he cites. He doesn’t really tell me how exposed we are.
I’m not saying he’s wrong. I just can’t tell whether he’s right or wrong based on his explanation.
