This chapter is from the book
This chapter is from the book
This chapter is from the book
International Economic Indicators
Up to now, we’ve dealt only with U.S. economic reports. Now let’s look at the growing importance of monitoring international economic indicators. During much of the twentieth century, Americans had only a remote interest in following the economic affairs of other nations. Few saw a need to take them more seriously. The U.S., after all, possessed the largest and most self-sufficient economy in the world and, by and large, had been impervious to the ups and downs of foreign economic cycles. If Germany or France or even the emerging countries of Asia suffered an economic downturn, barely anyone in the U.S. would care or even notice.
That’s not the case any longer. One historic change that has emerged early in the 21st century is the number of powerful new players on the global stage. For instance, the main driving forces of growth in the world today are not the mature industrial countries of the U.S., Eurozone, and Japan, but the developing nations across Asia and Latin America. Their entry has fundamentally reshaped the international economic landscape. Though the U.S. economy still reigns supreme in terms of size and influence, little else remains the same. China’s economy, for example, was seventh in size in 1995. It has since grown at hyperspeed, vaulting past the United Kingdom in 2005, Germany in 2008, and Japan in 2010, to become the second largest in the world. Brazil’s GDP has surged to seventh place, beating out Canada and Italy. Business activity in India has grown so much that its economy is now bigger than those of the Netherlands, Switzerland, and Austria, combined! These astonishing transformations were brought on by a reduction in trade barriers, greater economic liberalization, the modernization of global financial markets, and the extraordinary advances in telecommunications, the Internet, computer technology, and software. The results have reshuffled the economic map. For better or worse, the world economy has become more tightly integrated than ever before.
The implications for the U.S. are huge. Healthy domestic economic performance depends increasingly on how well other nations are doing. Gone forever are the days when this country was immune to financial and political mishaps originating halfway around the world. When OPEC decided to sharply boost oil prices in the mid- to late 1970s, Americans felt real pain. Indeed, U.S. inflation subsequently exploded, ultimately leading to one of the worst U.S. recessions since the Great Depression. Years later, investors took another beating during the Asian financial crisis in 1997 when the Dow plummeted by more than 550 points on October 27 because investors were worried that problems in Asia would hurt the U.S. economy and corporate earnings. In addition, who would have imagined that a bond default by Russia in 1998—a country with an economy the size of Illinois and Wisconsin combined—would be considered so grave a threat to world financial markets that the Federal Reserve was under pressure to orchestrate a global rescue plan to calm investors worldwide? More recently, the U.S. economy and financial markets have shown even greater sensitivity to foreign events. The fear of sovereign debt defaults spreading across Europe and rising anxiety over instability in the Middle East not only pummeled U.S. stocks but helped push America’s economy to the brink of recession the first half of 2011.
When it comes to sales and profits, U.S. companies are becoming more dependent on foreign economic activity. The numbers speak for themselves. About half the earnings of S&P 500 firms come from business generated outside the United States. More than 50 million Americans are now employed by firms engaged in foreign trade, according to the U.S. Department of the Treasury. One in three factory jobs is export related, and one in three acres on American farms is planted to satisfy the demand of hungry people overseas. It should not come as a surprise that the export industry has been the best performing sector in the U.S. economy over the past decade.
All this boils down to a crucial new reality: With 95% of the world’s consumers residing outside the U.S., foreign economic indicators should be followed with the same regularity, interest, and scrutiny as the domestic indicators. If foreign economies do well, U.S. firms are in a better position to sell more exports, earn more money, and keep millions of American workers employed. By closely monitoring the international indicators, U.S. companies can seek out new foreign markets or decide whether to expand (or shut down) facilities overseas. American investors can diversify their portfolios more smartly by identifying and purchasing those foreign stocks and bonds that might offer a lucrative return.
Another important reason to monitor the performance of other major economies is that it helps us check the mood of foreign investors. As long as they view the U.S. as a safe and attractive place to invest, capital from abroad will continue to flow into this country, and that is vital to the well-being of the U.S. economy. Foreign investors play an indispensable role in financing U.S. economic growth by lending this country an average of $2 billion a day—money that goes into buying stocks, bonds, and other American assets. Why does the U.S. need to borrow such huge sums from other nations? Because consumers and the federal government together spend so much on cars, computers, military hardware, and healthcare (to name just a few items) that little domestic savings is left over. Yet savings is the lifeblood that keeps an economy healthy. It’s used to finance productive investments, such as building efficient factories and funding the research and development of new and better products. Without adequate savings, the U.S. would be incapable of showing healthy long-term growth.
To make up for the shortfall in domestic savings, the U.S. has to lure the surplus savings of other countries. In addition, while all that foreign capital entering the U.S. has kept the economy humming, serious risks come with being so dependent on overseas creditors. Since the 1990s, America’s net foreign debt has skyrocketed from $50 billion to a staggering $3 trillion—the most of any nation in the world. In the process, foreigners have acquired an unprecedented share of U.S. assets; they own more than 50% of all U.S. Treasury issues, 25% of American corporate bonds, and about 15% of all equities. Should the mood of those investors turn sour on the U.S. market—something that can occur if there is poor expectation of investment returns here as compared with other countries—it could spark a sell-off of American stocks and bonds by foreigners.
For all these reasons, international economic indicators have lately taken on a more prominent role in the formulation of investment and business strategies. However, as with U.S. economic data, literally hundreds of foreign economic measures are released every month. With so much information being thrown at investors and business executives each day, how do you know which of these statistics are worthy of consideration? There is no one simple answer to this question. American companies and investors have different interests and risk exposures in the global economy.
In this book three factors are considered in determining the most influential international economic indicators: First, after the U.S., which are the largest economies in the world? Second, how liquid are the markets in those countries—that is, how easy is it to buy and sell securities on their exchanges? Third, who are the important trading partners of the U.S.? By trade, we’re talking about the exchange of goods (such as the sale of trucks, pharmaceuticals, and computers) and the exchange of services (such as insurance, consulting, transportation, and entertainment). The service sector is especially important because it includes the all-important category of investment flows. Table 1F lists the “must watch” international economic indicators.
Table 1F. Top International Economic Indicators
|
Indicator |
Page |
|
German Industrial Production |
364 |
|
German IFO Business Climate Survey |
366 |
|
German Consumer Price Index |
368 |
|
China Purchasing Managers Report—Manufacturing |
390 |
|
China Industrial Production |
396 |
|
Eurozone Purchasing Managers Report—Manufacturing |
385 |
|
Japan Tankan Survey |
378 |
|
Japan Industrial Production |
373 |
|
India Industrial Production |
403 |
|
Brazil Industrial Production |
410 |