Deflating the U.S. Decoupling Hypothesis

Includes: DIA, QQQ, SPY
by: Paul Kedrosky

Fans of the U.S. economic decoupling hypothesis -- the idea that current U.S. economic weakness won't be as damaging worldwide because the rest of the world relies on the U.S. less -- got backwards help today. U.S. markets fell only a little on Friday, but European markets tanked more than 5% today: Whoa, decoupling! More seriously, what we really had was evidence that U.S. troubles demonstrably worry market participants more than it apparently does pundits and Asian politicians.

Either way, it's fun to look at the data. There are lots of angles, including cross-market correlations -- but other markets tend to fall on U.S. crises, but not necessarily vice-versa, which doesn't help decoupling devotees -- and so on, but let's take trade. Assuming all major markets can be usefully characterized as open, so trade matters, how has the percentage of global GDP accounted by the U.S. changed in recent years? A decreasing share would help the decoupling argument, and a flat (or increasing) share would refute it.

Here is a graph of the U.S. share of global GDP since 1999 (note: the data source for this figure and the following two is the USDA):

That seems to support the decoupling idea. After all, the percentage of global trade tied to the U.S. has seemingly been in free-fall since 1999, thus decoupling, non?

Well, there are at least two problems. First, the above figure is only since 1999, so it would help to take a longer view of the U.S.'s share of global GDP. Is the above decline a recent trend? Or something else? You asked, so here you go:

Now that changes things. While there has been a decline since 1999, that was preceded by a period from 1991 to 1999 during which the U.S.'s importance as a percentage of global GDP grew even more than it has since declined. Well, darn, that's bad for decoupling. Then again, however, the current U.S. share of global GDP is on the lower end of things since 1969, so maybe it's a teensy bit bad, right?

Maybe, but it would help to normalize the Y-axis a little. After all, the above figure has a minimum point which makes the percentage swings seem much larger than they are. If you take a proper Y-axis zero point of, well, zero, and still keep the time period back to 1969, then you get a more sane view of things with respect to U.S. global GDP share.

The result? Yes, there has been a slight recent decline in U.S. share of global GDP, but that was preceded by a slight increase, and all of that by ... more wobbling around a fairly tight baseline. You could, in other words, make an awfully compelling argument that, when it comes to the importance of the U.S. to global GDP, darn little has changed -- whatever the decoupling devotees might say.