The U.S. economy has continued to perform fairly well this year despite protracted slumps in other key parts of the industrial world.
Inflationary pressures have been well repressed, and domestic spending has been on a reasonable track, rising at a 3% annual rate over the first three quarters of the year.
On the Downside
But there have been negatives that raise questions about the future.
Spending has been sustained in part because of a sharp and presumably one-time drop in the personal saving rate.
Meanwhile, growth in economic activity has lagged, increasing by only about 1 3/4% per annum through the third quarter of the year as U.S. exports stagnated in real terms and imports continued to expand.
The weakness in exports was caused basically by the poor economic performance of our major trading partners, not by any deterioration in our international competitive position.
On exchange markets the dollar is if anything undervalued, and domestic costs remain well under control.
Trade Volume Shrinks
Latest economic projections of the International Monetary Fund clearly illustrate what has changed.
In October, the fund significantly reduced its estimate of the increase in world trade volume for this year, compared with the estimate it had made in May.
The IMF now expects the data to show a noticeable deceleration in real trade growth from 1992 and 1993, instead of the modest acceleration that the organization had earlier projected.
Hard Times Abroad
The main cause is a marked deceleration in the import volume of industrial countries, a deceleration that it plainly related to disappointing economic performance, particularly in Japan but also in Western Europe.
In that context, it is in many ways remarkable that the U.S. economic expansion has persevered at a pace that is at least halfway reasonable.
We are obviously not strong enough to lift the rest of the industrial world.
Consumers to the Rescue
But we do seem to have enough of an internal dynamic to resist negative developments in other parts of the industrial world, not to mention our own continuing cutbacks in the defense sector and other federal spending.
However, this year our internal dynamic was sustained in large part because consumers were willing to borrow from the future - that is, as noted above, to reduce their already low personal saving rate.
Indeed, the drop in the saving rate from the fourth quarter of last year to the third quarter of this year wholly accounts for the rise in real spending by consumers between the two periods.
The counterpart to a weakening of domestic saving and more growth in spending than in output was of course the marked deterioration in the nation's real trade balance.
A deteriorating trade balance can mask inflationary pressures for a while.
True, domestic price inflation fundamentally tracks domestic labor cost pressures, which so far have been rather well contained.
But they could worsen later, once domestic spending increases are no longer cushioned by a weakening trade balance and have to be accommodated by drawing more on hitherto un-utilized domestic plant capacity and labor.
Crucial Question
Whether domestic spending will in fact be well sustained is the key question.
For that to happen - and recent data have been positive - we will need more job creation and domestic income growth in the private sectors, because spending to be supported by reduced saving.
Indeed, the personal saving rate is more likely to rise than decline next year. And the federal budget deficit should be contracting.
U.S. monetary policy will thus be entering a very difficult period. It will bear the main burden for encouraging growth in domestic spending and in the job creation necessary for it.
That will argue for keeping credit market conditions rather accommodative.
Inflation Worries
However, the monetary authorities will also have to decide how much inflationary potential they should tolerate as growth in spending comes to be met more and more from increased utilization of domestic plant and labor capacity rather than from a further deterioration in our trade position.
And there is always the prospect, however remote it seems now, that at some point next year economic activity in industrial countries will start to recover, thereby adding further pressures on domestic resources as production for export picks up.
