Signs that the end is not upon us

As the New York Times frets about China’s rise to economic pre-eminence, Americans are understandably concerned about the size of the trade deficit and the possibility of a housing bubble. I’ve been moderately concerned about both — but two small stories muddy up my worries a bit. The first is the fact that the U.S. is relying less on official purchases to finance its current account deficit:

The US became less dependent on inflows for foreign central banks to support the dollar in the first three months of the year, according to figures released on Friday. The current account deficit hit a record $195.1bn in the first three months of the year – equivalent to 6.4 per cent of GDP. Some economists now expect the deficit for the year to reach $800bn – requiring huge inflows of foreign funds into the US in order to prevent a fall in the dollar. Recently the US has relied heavily on purchases of US assets by Asian central banks in order to fund its deficit – in particular from China, where the authorities buy dollars in order to prevent a rise the renminbi from hurting exports. Over the latest quarter, however, private investors took more of the strain. Net official flows were just $24.7bn in the quarter – down from $94.4bn in the final three months of last year. Meanwhile, net private inflows rose from $73bn in the forth quarter to $131bn in the first quarter of 2005. “Every trading day the US needs to attract about $3bn of net foreign inflows – which makes a huge demand on the world’s savers,” says Nigel Gault, director of US research at Global Insight, a consultancy. “But so far there are few signs that investors world wide are tiring of US assets. There may be worries about the US economy but most other places look a lot worse.” (emphasis added)

This is always the thing to remember about the U.S. economy — as parlous as conditions may look right now, one must always compare the United States to other possible locations for investors. Compared to the regulatory, demographic, and political uncertainties present in Europe, Japan, and yes, even China, the U.S. looks pretty good. As for the housing bubble, Daniel Gross points out in Slate that housing has been the primary job engine since the start of the 2001 recession — but that could be changing:

The apparent reliance on housing to spur job growth could mean we’re cruising for a fall if the red-hot sector shows signs of cooling. But it’s also possible that housing was the bridge that helped us get over the post-bust job chasm. Between June 2004, when the Federal Reserve began raising rates, and April 2005, [Northern Trust economist Asha] Bangalore notes, “housing and related industries have accounted for 13.0% of private sector payrolls.” [this is in contrast to the time period from November 2001 to the present, when 43.0% of payroll jobs were created in the housing sector–DD.] In other words, as talk of a housing bubble increased, other nonhousing-related sectors were retaking the lead in job creation. To paraphrase Thomas Jefferson, it could be that a little bubble now and then may be exactly what this economy needed.

None of this is to say that the U.S. does not suffer from some serious economic imbalances that will require a combination of policies to solve. However, the situation may not be as hopeless as many prognosticators are saying. At least, this is what U.S. consumers and job-seekers seem to believe. Developing….