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Now, world buoys U.S. economy

Rising demand for US exports has offset the domestic downturn in home-building.

With concern growing about a possible recession, the United States is leaning increasingly on other nations as a source of economic growth.

It's not that the export of American-made goods can single-handedly prevent a slump if US consumers start spending less.

But after years when American consumers have pulled the global economy forward, today the roles are largely reversed. A growing global economy is providing the best source of momentum America has right now, as the nation's consumers struggle to cope with high oil prices and a downturn in the housing market.

How big is the momentum? Enough to offset much of housing's negative impact. Over the year that ended on Sept. 30, a rise in US exports has equaled the decline in residential construction that represents the biggest portion of housing's current drag on growth.

"One of the reasons that the US economy has avoided a recession so far, despite a ... prolonged downturn in the housing industry, is because of the stimulus that the US has received from the global boom," says Ed Yardeni, an economist at Yardeni Research Inc. in Great Neck, N.Y. "It's been a big benefit, and I think it will continue be so."

Global growth benefits the US through several channels:

•The most obvious is that exports have been rising, now running at an annualized pace of $1.7 trillion, up from $1.5 trillion a year ago.

•America's largest companies also gain profits from sales of goods and services by their foreign-based operations. The employees are overseas, but the resulting profits provide a cushion for these companies during a US slowdown. Just ask General Motors Corp.

•The US enjoys access to foreign sources of capital that are more abundant than ever. This includes a continuing flow of investment funds – despite the drawbacks of a weaker dollar and the mortgage woes of US banks. It also means direct investment by foreign firms in US operations.

On Monday, for example, the British/Australian mining giant Rio Tinto announced plans to invest $300 million in a Michigan-based nickel and copper mine.

In some cases, the funding can come from controversial "sovereign wealth funds" owned by foreign governments. But at a time when many US banks are struggling to raise capital, the biggest – Citigroup – recently welcomed an influx of cash from one of those funds, the Abu Dhabi Investment Authority.

These gains don't wipe away the significant challenges facing the US economy. Nor do they mean that the rest of the world is on an unstoppable roll.

The risk of a US recession remains high. Some economists believe such a contraction in economic activity is already under way, or will be early in 2008.

Europe and Japan, two other global heavyweights, are seeing some signs of slower growth. And the rest of the world is vulnerable to the negative effects of a US slump.

"The places that have good momentum are probably also the places that would be hurt by a US slowdown," says Jay Bryson, an economist at Wachovia Corp., a bank and investment firm based in Charlotte, N.C. That includes trading partners in Asia and Latin America.

Moreover, windfalls of investment from oil-rich nations in the Middle East are, to some extent, just the flip side of higher oil prices that have hit US consumers.

Still, there are more than a few grains of truth to the story about solid global growth – and the lift that gives to America. Perhaps the most significant factor is that developing nations are growing robustly – with fortunes tied to more than just exports to US consumers. These nations are selling to one another, and to their own domestic consumers, more than ever before. And they have more cash on hand for emergencies.

Joseph Quinlan, chief strategist at Bank of America's Investment Strategies Group in New York, says that rising personal consumption in developing nations is as powerful as any force in the global economy now. "It isn't just Asia," he says. "It's Central Europe. It's the Middle East. It's Latin America."

That, he says, should mean that even as the global economy cools somewhat in 2008, it will still grow a bit above its long-term average of 3.7 percent a year. And that helps the US, too.

"I think it will carry us through," without a recession, Mr. Quinlan says.

In 2000, by his research, the US accounted for nearly 19 percent of all imports worldwide. Today, thanks to emerging-nation growth, that percentage has fallen to 14 percent – a level not seen since the early 1990s.

That's part of the reason behind a shrinking in the US trade deficit, in numbers released by the US Commerce Department Monday.

Seller Beware

Latin America may well take a serious hit in 2008 – the jury is still out and much depends on how hellish the external environment gets. But as 2007 drew to a close, the tide finally turned on borrowers, many of which had enjoyed unprecedented easy access to capital for almost five years.

The change was not pronounced, and in some markets it was barely perceptible. But dedicated investors were most definitely pushing back, even if some high grade clients still refused to believe it. In the cloak and dagger world of syndicated loans, bankers had to break news of higher margins to corporations with enhanced balance sheets in countries cruising towards investment grade.

Some are still trying to play the relationship card, and there may be some banks dumb enough to fall for that. But funding costs have gone up globally and borrowers must realize this. Their deals will now include covenants and other structural fortifications. They may even be flexed much higher if the reversal extends.

In equities, the dream ended in tears, especially for Brazilian small caps, the bulk of which priced below target in November as once bitten investors got selective. Banco Panamericano hobbled over the finish line with its IPO, but it bagged 28% less than target. The deal was the tenth botched effort by leading equity house UBS so far this year. It adds to a pack of 2007 equity barkers, including Agrenco, Helbor and Laep.

Meanwhile in bonds, high yield corporates were sent packing by a skittish investor base looking to conserve the year's robust fixed income gains. An unprecedented number of junk offerings was pulled – even those with fairly conservative tenors and fat yields, some in the order of 12% – in one of the bloodiest Novembers in recent memory.

This all sounds like a long overdue return to sanity. The capital is being sourced from a riskier developed world. And even though a billion dollar loss seems to mean nothing these days – everyone's doing it, so what's the problem? – the price must go up.

Issuers have had it too good too long and some will be caught with their pants down as the cheap money exits. Just a few months back, issuers could get away with sloppy execution because the money just seemed to keep on coming. But shoddy aftermarket performance by high yield issuers like Digicel and Durango will be remembered when these and others like them next need to place debt.

It's time for issuers to face the music. LatAm markets are still hopping, but borrowers are no longer leading the dance.