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The slowing of domestic demand in the United States and the relative strength of its exports reflects a more general rotation of global demand away from dissaving fueled by the collapse of the U.S. housing sector toward a more balanced profile where demand in developing countries is increasingly driving the global expansion.
The rotation in demand is helping to rebalance both the U.S. and the global economies. The effects are already visible in the U.S. balance of payments.
Despite rising oil prices, the U.S. trade deficit narrowed by 0.6 percent of GDP during 2007.
Although a scaling back in household spending is painful in the short run and is likely to amplify the distress in financial markets, rebalancing of growth is crucial for long-term stability, because it will reduce the potential for future financial turmoil.
While the improvement in the U.S. trade balance is positive news from a global perspective, it has been accompanied by a sharp decline in U.S. imports, which prompts the question of whether domestic demand in the rest of the world can expand quickly enough to support strong growth for developing countries while at the same time cushioning the slowdown in the United States (and potentially in Europe and Japan) by providing sufficient demand for its exports.
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