For months the blogospere has been alight with talk of the US real estate bubble bursting, a downturn in consumer spending (because there is no more equity left in people's houses), and the increase in the price of oil…. to name just a few reasons.

Nothing major has happened so far, but that is when you have to remember that getting the early weather warning means that you have time to go into the storm cellar. Just because the full impact hasn't happened yet does not mean it is time to emerge and go into denial. And the dollar has started to show a bit of weakness in the last few days.

Here is what Stephen Roach has to say about the macro economic picture. I find this particularly interesting when framed in a discussion about China and their economic policies. This is really important!

A second possibility that could provide an external shock to China would be a sharp slowdown in the US economy.  America is China’s
largest export market — directly accounting for 21% of its total
exports over the past five years and a good deal more than that if
re-exports from Hong Kong are added
back in.  Moreover, exports are likely to exceed 35% of Chinese GDP
this year — making it, by far, the most externally dependent major
economy in the world today.  Yet economic conditions in China’s largest export market — the United States — are deteriorating dramatically in the final months of 2006.  This is a big deal not only for China but for other externally-dependent economies elsewhere in Asia — especially the big ones like Japan, Korea, and Taiwan. 
These latter economies could well be hit with a “double whammy” in the
event of a shortfall in US economic growth — a reduction in their
direct exports to America and a cutback in the demand for components
they send to China that are then assembled in the “world’s factory” on
their way to the US.  Lacking in support from domestic private
consumption, a China-centric Asian economy is an unlikely candidate for
decoupling in the event of a US growth accident.

It’s
worth belaboring this latter possibility — only because most remain in
denial over the swift and sudden deterioration in the US economy.  That’s true in China, as well as in the United States and elsewhere around the world.  Yet there are now signs of cumulative weakness in the US
economy that have all the classic manifestations of a looming cyclical
downturn.  It all started, of course, in the housing market — the
sector where everyone has been calling the bottom over the past few
months.  One of these months that call will certainly be correct. 
However, October’s outsize decline in housing starts, together with
downwardly-revised readings of new home sales and still sharply
elevated backlogs of unsold dwellings, pose serious problems for the
bottom-fishers.  Keep in mind that any call on housing starts pertains
to the leading edge of homebuilding activity — the initiation of a new
building project.  Starts always bottom first — even though they may
not have done so yet.  What comes next — and this is the key for the
macro economy — are the lagged impacts from a fallback in newly
started units that then depress subsequent trends in construction,
employment in the building sector, the income generation forthcoming
from such activity, the furniture and appliances that go into new
homes, real estate brokers, and so on down the feed chain.  Don’t kid
yourself, even if housing starts have finally bottomed, there’s plenty
to come in America’s nascent recession in the residential construction sector.

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Posted in Economics Main Page by Chris Gilbey No Comments Yet