US economy is key to the global economy

[Edward Harrison, journalist, 8-2-22, Bloomberg, “Global Recessions Are Made in the USA. The Next One Will Be Too,” , accessed 6-3-23]

What happens in America rarely stays in America — economically-speaking that is. To the degree that the US economy is losing steam, it’s likely to add to pandemic-related supply chain woes and the war in Ukraine in crimping the global economy. In a worst case scenario, it could end in a global recession.

Gloom and doom about the global economy

The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession.

-International Monetary Fund Chief Economist Pierre-Olivier Gourinchas, IMF Blog, July 26, 2022

Get ready for a global recession! The words seem to be on almost everyone’s lips. Most major observers aren’t currently predicting one as their base case, but the drumbeat is growing about the potential risk. And while many of the biggest risks right now are international in nature — disease, supply chain issues, the war in Ukraine, geopolitical tensions in east Asia — what happens in the US appears to be the real key.

There have really only been four global recessions since World War Two, that is episodes when annual real per capita worldwide gross domestic product actually contracted. This happened in 1975, 1982, 1991, and 2009. In each case, a US recession preceded the global one. This time should be no different.

It makes sense. The US moves to its own beat. There are only around six countries in the world less dependent on trade to fuel growth than the US, which is a relatively self-contained “continental economy.” Yet these global problems — and the inflation they’ve kickstarted — are proving very troublesome for America. If the US fails to contain the fallout from them at home, given the heft of the US as a sort of global consumer of last resort, that could very well be the trigger for a larger downturn globally.

That means the stakes are even higher for the Federal Reserve as it looks to thread the needle of taming inflation without inducing a deep (or long) soul-sucking recession. If it can pull off that magic trick — and I’m somewhat dubious that it can — then it would be a win not just for the US but the world.