Booming U.S. Economy Ripples World-Wide

Date: Wednesday, December 22, 2021
Source: The Wall Street Journal

FRANKFURT—A booming U.S. economy is rippling around the world, leaving global supply chains struggling to keep up and pushing up prices.

The force of the American expansion is also inducing overseas companies to invest in the U.S., betting that the growth is still accelerating and will outpace other major economies.

U.S. consumers, flush with trillions of dollars of fiscal stimulus, are snapping up manufactured goods and scarce materials.

U.S. economic output is set to expand by more than 7% annualized in the final three months of the year, up from about 2% in the previous quarter, according to early output estimates published by the Federal Reserve Bank of Atlanta. That compares with expected annualized growth of about 2% in the eurozone and 4% in China for the fourth quarter, according to JPMorgan Chase

Major U.S. ports are processing almost one-fifth more container volume this year than they did in 2019, even as volumes at major European ports like Hamburg and Rotterdam are roughly flat or lag behind 2019 levels. The busiest U.S. container ports are leaping ahead of their counterparts in Asia and Europe in global rankings as volumes surge, according to shipping data provider Alphaliner.

In Europe, “durable goods consumption is showing nothing like the boom that is ongoing in the United States,” said Fabio Panetta, who sits on the European Central Bank’s six-member executive board, in a speech last month. Consumption of durable goods has surged about 45% above 2018 levels in the U.S., but is up only about 2% in the eurozone, according to ECB data.

Factory gate prices in China are far outpacing consumer prices, signaling a gulf between weak domestic demand and strong overseas demand that is powered in particular by U.S. hunger for China’s manufactured goods.

While tangled global supply chains also play a role in driving global inflation, economists and central bankers are increasingly pointing to ultrastrong U.S. demand as a root cause.

“Are we crowding out consumers in other countries? Probably,” said Aneta Markowska, chief financial economist at Jefferies in New York. “The U.S. consumer has a lot more purchasing power as a result of fiscal policy than consumers elsewhere. Europe could be in a stagflationary scenario next year as a consequence.”

The U.S. accounts for almost nine-tenths of the roughly 22-percentage-point surge in demand for durable goods among major advanced economies since the end of 2019, according to data from the Bank of England.

“Very strong U.S. demand is certainly where [global supply bottlenecks] started,” said Lars Mikael Jensen, head of network at container ship giant A.P. Moller-Maersk A/S.

“It’s like a queue on a highway. The increase in volume in the U.S…takes ships away from other markets,” said Mr. Jensen. “Problems in one place will trigger problems somewhere else, we live in a global world.”

The U.S. economy will likely grow by around 6% in 2021 and 4% or more in 2022, the highest rates for decades, analysts say. Strong U.S. growth momentum is expected to push the unemployment rate to the lowest level in almost seven decades by 2023, according to Deutsche Bank analysts.

U.S. economic output is likely to surpass its pre-pandemic path early next year, while output in China and emerging markets will remain about 2% below that path through 2023, according to JPMorgan Chase.

U.S. wages are growing by about 4% a year, above the precrisis trend rate, compared with less than 1% growth in the eurozone, according to data from the Bank for International Settlements, a Switzerland-based bank for central banks.

“We threw a lot of support at [the economy] and what’s coming out now is really strong growth, really strong demand, high incomes and all that kind of thing,” said Federal Reserve Chairman Jerome Powell after the central bank’s recent meeting. “People will judge in 25 years whether we overdid it or not.”

The Fed said it would more quickly scale back its Covid-19 bond purchases and set the stage for a series of interest-rate increases beginning next spring

In Europe, the ECB pledged to continue buying bonds at least through October 2022, and said it was unlikely to raise interest rates next year. Underlying U.S. inflation, annualized over two years, has risen above 3%, roughly double the level in the eurozone, according to data that adjust for the impact of the pandemic and changes in volatile food and energy prices.

“The strong post-pandemic recovery that was originally expected for 2022 still hasn’t materialized,” said Timo Wollmershäuser, head of forecasts at Germany’s Ifo think tank. The institute recently lowered its growth forecast for Germany in 2022 by 1.4 percentage points, to 3.7%, citing ongoing supply bottlenecks and a new wave of Covid-19.

The Fed’s assertiveness is pushing up the value of the U.S. dollar and putting pressure on emerging-market central banks to increase interest rates even before their own economic recoveries are assured or risk depreciating currencies and runaway inflation.

Mexico’s central bank on Dec. 16 said it would increase its benchmark interest rate by 0.5 percentage point to 5.50% after inflation rose to a 20-year high of 7.4%.

Russia’s central bank said Friday it would increase its key interest rate by 1 percentage point to 8.5%, and might raise rates again soon, after inflation hit a near six-year high of 8.4%.

Businesses are pouring money into the U.S., looking to take advantage of what some expect to be a sustainable increase in demand. In some cases, they are bringing production closer to American consumers, looking to avoid supply shocks related to the pandemic and global trade wars.

Recent U.S. fiscal stimulus “gives us more confidence in the U.S. market. It makes it easier to go into this, and easier for customers to go in,” said Marc Becker, CEO for offshore at Siemens Gamesa Renewable Energy SA, a Spain-based wind-turbine manufacturer.

The company plans to invest more than $200 million to build offshore turbine blades in Virginia, which it says will be the first commitment by a global manufacturer in a U.S.-based supply chain.

Equipment investment in the U.S. is expected to rise by 13% this year, according to JPMorgan Chase. Capital investment in the eurozone will likely increase by 3.6% this year, while in Japan business investment will rise by 0.1%, the bank predicts.

Two new U.S. fiscal spending packages worth a combined $3 trillion could boost the American economy by between 0.5 and 1 percentage point in each of the next two years, according to Oxford Economics, although the future of the larger of those bills was thrown into doubt last weekend. Meanwhile consumers continue to spend money from earlier stimulus packages.

Meyer Burger Technology AG , a Swiss manufacturer of solar modules, plans to build its first U.S. factory by the end of next year, adding to existing production facilities in Germany. That signals a change for the solar industry, where about 80% of production is currently located in China.

The decision was driven by surging transportation costs and rapidly growing U.S. demand, said CEO Gunter Erfurt. Logistics costs are up to four times higher than before the pandemic, he said.

“U.S. customers see and feel that supply chains are shaky and they can’t trust them anymore. Solar modules don’t arrive or arrive late,” Dr. Erfurt said.

Foreign direct investment into the U.S. has rebounded above precrisis levels and roughly matched foreign investment into China in the second quarter of 2021, according to Oxford Economics. The U.S. became the world’s largest recipient of foreign direct investment in 2019 and consolidated that position in 2020, mainly driven by higher direct investments from Japan, Germany and the Netherlands, according to the International Monetary Fund.

“Everybody in every industry is currently checking if it’s smart to manufacture only in China,” said Mr. Becker of Siemens Gamesa. Congested ports in China and rising transport costs show the vulnerability of long supply chains, he said.

 

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