The US economy is continuing to confound the experts. Contrary to many expectations Americans are enjoying the longest running boom in their recent history.
The country is about to enter its tenth year in a row of expansion, unemployment is at historically low levels and inflation is under control.
More than half of all Americans have funds in the stockmarket and they are mostly feeling good and spending large amounts of money. International investors are continuing to pour money into the economy and the chairman of the Federal Reserve, Mr Alan Greenspan, is continuing to ride a wave with a general feeling that he has almost personally engineered this good fortune.
Europe in contrast is limping along. Growth may be heading for 3 per cent this year but that is likely to be the extent of it. Last year the euro zone only grew at just over 2 per cent and already many analysts are predicting that 3 per cent may not be reached in 2000. At the same time interest rates, and hence the return on investments, is far higher in the US with official rates standing at 5.75 per cent, compared with rates of only 3.25 per cent in the euro zone. Finally, the US stockmarket, particularly the Nasdaq has been driving world markets. In Europe the story is mixed, the Frankfurt Dax is up but by a lower amount and other indicies such as the ISEQ are still showing losses over the past year. It is no wonder that international investors continue to prefer Wall Street to Frankfurt or indeed Paris.
Many had predicted that the gap between growth in the US and Europe was set to close; that would herald an era of euro strength allowing the new currency to establish itself once and for all on the international financial stage.
But that has not happened. Indeed, according to the most recent data, the US is powering ahead again. Growth in the last three months of 1999 was some 6.9 per cent, a seriously high rate for a large mature economy. Japan saw similar rates in the mid-1980s, in Germany the postreunification building boom saw growth rise to 5.5 per cent, but it was 1976 when growth rates of that magnitude were common.
Overall the US economy grew by 4.1 per cent last year, by 4.3 per cent in 1998 and 4.5 per cent in 1997.
This has been driven by the labour market. Unemployment has fallen to 4 per cent from a high of 8 per cent in 1992. There has also been huge job creation with around 250,000 net new jobs being created every month.
But that does hide another story. The main job creation has been in the services sector which is relatively low paid and menial. Many of the new jobs have been filled by people taking on second jobs. In an already work obsessed culture that leaves little if no time for family or leisure.
Unlike here, the high-tech sector is mostly capital intensive and manufacturing job creation has been sluggish.
But for those who are in good jobs the money is generous and there is little job insecurity. That is encouraging people both to spend and borrow more.
The average middle-class American now owns as much in stocks and funds as he does in real estate. And the continuing boom in the stockmarket, particularly the technology-dominated Nasdaq, is very positive for their sentiment.
A few may be cashing in mutual funds to fund large purchases, but many more are funding their spending on borrowings, which are based on the growth of their equity portfolios.
As a result perhaps the biggest threat to ongoing growth in the US economy is a stockmarket crash and perhaps particularly a crash in the high-technology Nasdaq.
Bank of Ireland chief economist, Mr Jim Power, says that a 40 per cent correction on the Nasdaq would be enough to undermine the entire structure at the moment. It would take 2 per cent off the growth rate whereas the Federal Reserve estimates that a similar correction on the Dow would shave 1 percentage point off the growth rate.
Many commentators believe the Nasdaq is in bubble territory and the danger of a crash is high. But according to Mr Power, this may be just the start of a technology revolution. It is undoubtedly the fastest growing industry in the globe and there are numerous reasons which point to the possibility that it will continue to expand.
But assuming that a crash is averted then the task for Mr Greenspan will be to try and bring the economy back towards a growth rate of around 3 per cent to 3.5 per cent over the next year. According to Dr Maury Harris, chief economist at Paine Webber, interest rates will rise to 6.25 per cent from 5.75 per cent by mid-year.
That is likely to support the dollar and keep the euro under pressure. Those looking for a euro turnaround have often pointed to the balance of payments situation in the US. The deficit is huge and growing. Indeed it was the sheer propensity of Americans to spend more and more on imports which lifted the world out of a global recession. That is still happening.
This year the US balance of payments deficit will probably be around $300 billion (€311 billion). In contrast, in the first 11 months of 1999 the euro zone surplus was €40.6 billion. At the same time €148.9 billion flowed out of the area, largely from investment portfolios and direct investment.
This will become an issue if the equity market crashes. At the moment the US is finding it very easy to finance the deficit as trade and investment flows continue. But a turnaround would make it very difficult and the dollar could fall back very rapidly as a result. But it is doubtful that anyone in Europe would seriously relish a stockmarket crash in the hope it would boost the euro.
