State tax revenues are being seriously crimped by the housing bust, reported the New York Times in its lead front page story on Sunday.
What took it so long? How the World Works posted the exact same news on Feb. 12. But never mind that; the key paragraph in the Times' coverage referred to the drying up of consumer spending as homeowners stop extracting cash from their home equity. "Homeowners who tapped into plentiful home equity and spent extravagantly during the real estate boom have started to cut back," reports Abby Goudnough. This is significant, because:
In one hint of how much Floridians were relying on property wealth during the real estate boom, 16 percent of new car purchases here were being made with home equity loans in 2006, compared with 7 percent nationally, according to CNW Marketing Research, an automotive research firm in Bandon, Ore. In California, the percentage was even higher -- about 30 percent, said Art Spinella, the firm's president.
Let us now turn to Chapter 4 of the International Monetary Fund's World Economic Outlook, released this week, on the topic of how tightly interconnected the U.S. economy is to the global economy.
The news hook for this chapter is that the housing bust in the United States has not yet affected the global economy. The IMF argues that this is because internal sectoral problems in the U.S. do not ruffle the rest of the world as much as big global catastrophes (like the oil shocks of the '70s or the information technology bust of 2001) that bring everybody down. If the U.S. experienced a sharp recession, that would be a different story, but so far, all the U.S. is experiencing is a "mid-cycle slowdown," and the evidence of the last 30 years indicates that the rest of the world shrugs off such ephemera. So much for the "if the U.S. sneezes, the rest of the world catches a cold" theory. According to the IMF, it's more like: "If the U.S. gets the stomach flu, the rest of the world gets the stomach flu."
A first response to this would be to note that, if state tax revenue shortfalls in the U.S. only started to show up in January (and only now in the New York Times), maybe it's a little too soon to gauge what the overall impact on the global economy will be.
But the more interesting takeaway from the IMF study is this: Spillovers from the U.S. economy to the rest of the world do occur -- in fact, the evidence appears to show that in the last 20 years, "the magnitude of the spillovers may have increased over time" for those countries with more open economies.
There is also some evidence that the magnitude of spillovers from U.S. growth is significantly larger into those countries that are more financially integrated with the United States... This evidence is consistent with recent empirical studies that find that stronger trade linkages lead to increased synchronization of business cycles across countries and that increased financial integration leads to higher cross-country output (and consumption) correlations....
The influence of the U.S. economy on other economies does not appear to have diminished. On the contrary, indications are that the magnitudes of spillovers have increased over time, particularly in neighboring countries and regions, which is consistent with the notion that greater trade and financial integration tends to magnify the cross-border effects of disturbances.
The fact that countries that export a lot of goods to the U.S. suffer disproportionately when U.S. growth slows is not immediately surprising -- the U.S. is the largest importer in the world, sucking in a total of one-fifth of all goods exported. But underlying that dynamic lurks an implicit critique of globalization. The more a country buys into the global economy, the more it loosens up controls over capital flows and boosts trading activity, the more likely it is to take a hit when the U.S. stumbles. Which means when Floridians stop buying new cars because they've stopped cashing in on their home equity, China should be paying attention.