America Is Driving the Global Economy. When Does That Become a Problem?

New trade data suggests the outlook for the U.S. economy will depend in part on the rate of recovery of other nations.


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Containers stacked at the Port of New York and New Jersey in Elizabeth, N.J., last month. The U.S. trade deficit was $68.9 billion in April, far above levels immediately before the pandemic.Credit…Seth Wenig/Associated Press

The United States, with its aggressive pandemic aid measures and rapid vaccine rollout, is propelling the world economy forward, acting as a source of demand from all corners of the globe.

The American government has been spending billions, creating booming demand in the United States. As new trade data shows, though, a meaningful share of this money is leaking overseas and going toward imported goods, in what economists call “fiscal leakage.”

Ultimately, the outlook for the American economy will depend on the ability of other countries to take over as drivers of global demand in the months ahead — a prospect that remains uncertain.

America is buying much more stuff from overseas, as its stimulus-fueled economy revs forward, while the rest of the world has not yet caught up and started buying more American exports. That is why the trade deficit was $68.9 billion in April, which was down from $75 billion in March, but far above levels of around $45 billion per month immediately before the pandemic. People are spending their stimulus money on imported furniture, appliances and other goods.

One effect is that the rest of the world is acting as a pressure valve for inflationary forces that are building within American borders. If you think gasoline and lumber prices are high now, imagine if the slow-growing economies of Europe and Japan were recovering at the same breakneck pace as in the United States.

“Fiscal leakage is inevitable,” said Maurice Obstfeld, a University of California, Berkeley, professor and former chief economist of the International Monetary Fund. “It’s desirable to the extent it will somewhat moderate inflationary pressures. And it’s desirable to the extent that to some degree it helps spur growth in the rest of the world, some of which comes back to help us.”

It reflects a difficult geoeconomic needle the United States is trying to thread. It’s best for everybody if the rest of the world joins in the party and is able to power global demand, especially once the American stimulus dollars are largely played out. But if that resurgence is too fast and too strong, it will just make the inflation problems already evident in many markets worse.

Moreover, some of the most effective tools involve global vaccine distribution, not economic policy. Successful vaccination would help get supply and demand, both for physical goods and for tourism and other services, back on track.

The United States typically runs a large trade surplus in services, including software, Hollywood films and banking. But the biggest single area of services exports before the pandemic was international travel.

In the math of global economics, a foreign tourist staying in the United States is essentially purchasing an American services export. Travel exports were only $18 billion in the first four months of 2021, down from $67 billion in the same period of 2019.

Meanwhile, flush American consumers have shifted their spending away from services and toward goods. In the first four months of the year, imports of consumer goods were 29 percent higher than in 2020, a $57 billion jump.

“The only thing people could consume was goods,” said Constance Hunter, chief economist at KPMG. “You couldn’t have a wedding, you couldn’t go to a baseball game. So what did people buy? They bought goods, and that’s much more of a global market than services.”

In effect, the United States and China are acting as the drivers of the global economy, while most of the rest of the world is further behind in recovery from the pandemic.

In the I.M.F.’s World Economic Outlook published in April, the United States’ 2021 G.D.P. was forecast to be 3 percent above its 2019 level, while China was forecast to be 11 percent above its 2019 level. But the euro area and Japan were each on track to have economies 2 percent smaller than in 2019, with Britain, Canada, Brazil and Mexico also forecast to be in negative territory.

That is unfortunate for the people in those places experiencing sluggish recoveries, but is probably helping to keep supply shortages in many sectors from being even worse. Already, a shortage of semiconductors has held back production of automobiles; shortages of building materials has suppressed housing construction; and a shortage of shipping containers has sent prices skyrocketing for moving goods across oceans.

“If everybody was stimulating simultaneously, and everybody was enjoying peak growth simultaneously, you could see more congestion,” said Nathan Sheets, chief economist at PGIM Fixed Income and a former top international economist at the Federal Reserve and U.S. Treasury.

A promising possibility would be if the baton of economic growth could gradually be passed around the world — having started in 2020 in China, continuing through the first part of 2021 in the United States, then to other parts of the world as the American stimulus dollars fade. That could help the United States avoid a post-stimulus economic hangover.

“If Europe is lagging us by a quarter or two, and emerging markets are lagging Europe, maybe we could get a phased global recovery where the growth that we get is a good thing, without putting too much pressure on supply at once,” Mr. Sheets said.

The sluggish pace of vaccination in many parts of the world is a risk on all sides. It appears to be holding back output in important ways, contributing to America’s inflation problem — witness, for example, a recent Covid outbreak at a Taiwanese chip factory that stopped production of a product already in short supply.

The I.M.F. recently published research showing that an ambitious global vaccination plan could bring robust rewards. Achieving worldwide vaccination rates of 40 percent would inject the equivalent of $9 trillion into the global economy by allowing a faster return of normal commerce. Forty percent of the gains would go to advanced economies like those in the United States and Europe.

That means the enormous trade deficits of the last couple of months could well fade in the months ahead — but only if the entire world is able to stay healthy, with growth revving, as well.

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