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The U.S. economy is slowing down and that could mean trouble for the rest of the world. The United States has acted as consumer of last resort for many of the world’s exporters. As the U.S. economic expansion brakes, those countries will have to find other markets for their goods or risk a slowdown of their own. The burden falls on Japan and the European Union to do more to stimulate domestic demand. Failure to do so means that the world economy could face a hard landing next year.

A series of rate hikes by the U.S. Federal Reserve is having the intended effect. Although interest rates have not changed for six months, they are currently at 6.5 percent, the highest point in nine years. In a report released last week, the U.S. Commerce Department said gross domestic product expanded at an annual rate of 2.4 percent, its weakest pace in four years and a sharp decline from the 5.6 percent growth recorded in the second quarter and the 4.8 percent of the first. Although a slowdown was expected, the U.S. figures exceeded even the initial estimate of 2.7 percent that was made last month.

The impact is evident across the board. U.S. factories reported a 5.5 percent drop in demand for big-ticket manufactured items. Orders for durable goods fell for the time since July. Consumer confidence last month dropped to its lowest level in a year. Consumer spending rose in October by the smallest amount in six months and incomes fell for the first time in almost two years. It is hard to say whether the plunge in stock markets has been a cause or an effect of the slowdown. But one thing is certain: The Nasdaq index has lost 48 percent of its value since its record high in March, and consumers are uneasy.

All is not grim, however. Unemployment remains at 3.9 percent, a 30-year low. Labor markets will remain tight as employers show a willingness to continue hiring through the first quarter of next year. Unfortunately, that threatens to ignite inflationary pressures, as pointed out by the president of the Chicago Federal Reserve Bank last week. That will cut the Fed’s leeway if the economy slows still further and the board wants to lower interest rates.

While there is little question that the U.S. has risked overheating, a slowdown will take the steam out of the global economy if other countries do not pick up the slack. In a report released last week, the World Trade Organization applauded 10 percent growth in global trade, but noted that more than half the expansion in world trade was a product of the increase in imports and exports in the United States. The WTO cautioned that U.S. imports accounted for 18.5 percent of the world total, a “historically unprecedented level.”

Europe has shown some promising signs. The European Commission has forecast growth of 3.4 percent this year, which will slow to 3.1 percent next year and 3 percent in 2002. While those numbers are consistent with other estimates, rising fuel prices and the U.S. slowdown could drag them down. Signs of a slowdown in manufacturing in Europe are already evident; one manufacturing index has declined since April and has dropped to its lowest level in over a year. With inflation topping the European Central Bank’s target of 2 percent, there is little prospect of monetary easing to stimulate growth.

This country’s economic outlook is also cloudy. Jobless rates continue to hover at 4.7 percent, near the all-time high, and household spending in October fell 0.1 percent year-on-year in real terms in October. With consumer prices marking a 0.6 percent drop in October — their 13th consecutive month in decline — economists both in and out of the government worry that the shaky recovery might yet be derailed.

There is some room for optimism. Incomes rose in October for the first time, and the dip in consumer spending followed a rise in September, the first expansion in five months. The supplementary budget will continue pumping money into the economy. Corporate restructuring and deregulation are proceeding more slowly than hoped, but they are moving forward, nonetheless. Increased efficiency and new business opportunities should help rejuvenate the economy.

That will take time, however. The prospect of a U.S. slowdown is more immediate. Japan is unlikely to be affected directly by a U.S. slowdown — although goings-on in U.S. stock markets are likely to be echoed here — but the rest of Asia will not be so lucky. Those countries rely heavily on the U.S. market. When they feel it soften, they will transmit those signals on to Japan. At that point, policy makers around the globe must be ready for the consequences. A couple of failed banks, or insurance companies or large corporations could turn a slowdown into a hard landing. The time to prepare is now.

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