Sluggish global economy won't stop US recovery

There has been a lot of negative economic news in recent weeks about some of America's largest trading partners. Japan's economy just registered its second consecutive quarter of negative GDP growth, which means that it is now officially in a recession.

The reports from the eurozone are also bleak — Germany's economy is struggling, and France and Italy are already in a recession. Even the Chinese economy is showing signs of weakness. Just when it seems that the U.S. economy is finally gaining traction and we can look forward to 2015 with increased confidence, we now have to worry whether the world's other major economies will spoil the fun next year.

Let me state right at the beginning that I do not believe the U.S. recovery is in any jeopardy.

It would be nice to have growing demand for our products in all of the world's markets, but it is not necessary. American companies engage in a lot of foreign trade, but the U.S. still has a relatively closed economy. This is because exports account for only about 15 percent of this nation's GDP. A substantial amount of these exports are sent to our closest neighbors, Canada and Mexico, and the economic outlook for both of these countries is favorable. So the vast majority of goods and services that are produced in the U.S. are consumed right here in North America, and the North American economy is poised for a year of solid growth in 2015.

The eurozone accounts for only about 20 percent of all U.S. exports. Trade with our European partners will most certainly be diminished if these economies stall or fall into a recession, but it will not disappear entirely. If you are a company that relies on the European markets for a significant portion of your business, then you should be prepared for tougher market conditions and lower demand in these countries. But the effect on the total U.S. economy will be a relatively small one.

The outlook for the Chinese economy is a bit trickier because the economic data that comes from China is less reliable. I am comfortable in reporting that the growth rate for the Chinese economy is slowing, but it is not clear what the rate of descent is. Such information would be particularly useful right now, but as usual, we can only make estimates based on the information that the Chinese government provides.

One trend that is clearly evident however is the Chinese government's desire to prevent economic growth from slipping further than it already has. They will continue to invest in infrastructure projects, housing, technology and lending to small businesses. The result of all of this is that the Chinese economy may decelerate in 2015, but it will probably continue to expand at a solid rate for the foreseeable future.

With the large economies of both the U.S. and China providing the power, the growth in the overall global economy is actually expected to accelerate modestly in 2015 when compared with this year. The latest estimate for total global economic growth in 2014 is in the range of 2.5 percent, and the forecast for 2015 is a bump up to 3 percent. Faster growth in the U.S. will result in demand for more imported goods and this will be a tailwind for all of our major trading partners.

For those of you who plan to conduct a significant amount of business in other countries, the current outlook is that overseas market demand for plastics products and machinery will vary widely by region. By far, the strongest market conditions will be in North America in 2015. If you look further south than Mexico, then conditions will not be so good. Industrial production levels in Brazil, Argentina and Venezuela are in a firmly established downtrend, and most of the Latin American countries are counting on a surge in exports to North America to get their economies rolling again. This will likely happen, and the trade flows will be more favorable for their economies than for ours. In other words, imports from Latin America will grow faster than exports to Latin America in 2015.

The eurozone economies will continue to struggle in 2015, and here again, the growth in imports from these countries will be faster than the growth in exports to these countries during the coming year. There is a huge opportunity to export energy products — primarily in the form of liquefied natural gas — to Europe, but that will not happen anytime soon. In the meantime, these countries are going to have to engage in politically unpopular economic reforms if they are going to have any chance of sustained recovery in the future.

The foreign exchange rate is another important factor for U.S. companies that either sell into foreign markets or compete against foreign competitors in the U.S. market. As the chart to the left illustrates, the value of the U.S. dollar has risen sharply in recent weeks. I expect this upward trend in the value of the dollar vs. the currencies of our major trading partners will continue through all of 2015.

U.S. manufacturers typically do not like it when the dollar appreciates because it makes foreign-made products less expensive in this country and American-made products more expensive in foreign markets. I am sensitive to these concerns, but I still believe that the long-term benefits of a strong dollar vastly outweigh the short-term disadvantages.

First, when the dollar is strong, then it is quite likely that our economy is strong. As I said before, the U.S. economy does not rely heavily on exports. Therefore, the amount of activity gained from a strong economy domestically will more than offset whatever is lost in foreign trade. Second, when the dollar is strong, foreign products are less expensive. This is not just manufactured goods like cars, but also commodities like oil and scarce minerals. And here again, the economic activity gained from cheaper energy and commodities in this country will outpace the reduction in net exports.

And finally, when the dollar is strong, it is because there is strong demand for dollars from foreign investors who want to invest in America. This increase in foreign demand elevates stock values and property values in this country, and it allows the U.S. government and U.S. companies to borrow money at lower interest rates. So, in the final calculation, manufacturers may lose foreign customers, but the increase in domestic customers should more than make up for it.

The trend of increased interdependence within the global economy will continue. But after witnessing the events of the recent past I am more convinced than ever that America must retain a position of leadership in the global economy. And it is quite likely that this will become increasingly evident in the months ahead.