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While most of the rest of the world plods along with slow or disappointing economic growth, the U.S. economy looks comparatively boomy. Revised figures released on Friday show that gross domestic product expanded by a remarkable 4.6 per cent in the second quarter, at an annualized pace, up from an earlier estimate of 4.2 per cent.
Sal Guatieri, an economist at BMO Nesbitt Burns, said that the U.S. economy "is firing on virtually all cylinders." However, his colleague Douglas Porter, BMO's chief economist, addresses the issue of whether a strong U.S. economy can function on its own without help from Europe, Japan and China – and what it means for investors.
"Perhaps the most important economic theme for financial markets heading into the fall is the widening growth divergence between the U.S. and much of the rest of the world," he said in a note. (I mentioned this in an article about the stock market rout on Thursday, but left out the details.)
His take: Yes, the U.S. economy can thrive without significant help from the rest of the world. As for whether the U.S. can pull the global economy by itself, though, he says the answer is at best a "maybe."
Financial markets, he noted, are taking a pessimistic view on this topic. That's why commodity prices have fallen 11 per cent since June and closing in on the lowest levels since 2010.
But over the past 25 years, evidence suggests that the U.S. economy is not at risk of being dragged down by others, pointing to three examples in the 1990s where exports were hit by problems abroad but the economy hardly stumbled: A recession in Europe in the early 1990s, the 1994 Mexican peso crisis and the 1997-98 Asian crisis.
Why? He mentions three factors: Exports account for just 13.5 per cent of U.S. GDP; exports are diversified across regions; and a third of exports go to Mexico and Canada, whose economies rest largely on how the U.S. is faring.
"On balance, we have little doubt that the U.S. economy can readily ride through choppy waters in many of the major overseas economies," Mr. Porter said.
As for global economic growth, the situation is a bit more iffy. Still, Mr. Porter believes that slowdowns in Europe, China and Japan will be contained, allowing the global economy to grow by 3.5 per cent in 2015, following three years with growth of about 3 per cent.
But the divergence between the U.S. and other economies has implications for investors. He identifies four of them:
1. The divergences should drive the U.S. dollar higher: "The currency has just had its longest winning streak since the 1960s (10 straight weekly gains), but its overall rise has still been modest so far," he said.
2. The U.S. economy is strong enough to keep the Federal Reserve on track to withdraw stimulus. It will end bond-buying in October and begin interest rate hikes in the second quarter of 2015, he says.
3. Global growth is good enough to put a floor under commodity prices. Just don't expect any big upward surge.
4. A stronger U.S. dollar, weaker Canadian dollar and modest commodity prices is good news for central Canada.