Mixed Economic News

The U.S. economy is really... weird right now. The underlying economic news is pretty great: the economy expanded 4.9% in the last quarter, which is the highest rate in four years. This 4.9% growth rate isn't sustainable -- indeed, it is nearly twice the maximum level of sustained growth as estimated by the Fed -- but it is still encouraging.

And yet. The housing "crisis" is worsening, and will continue to worsen, probably through 2008. Credit markets are still very tight, so the Fed will still feel pressure to loosen monetary policy. But there are still some inflationary concerns in the real economy despite deflationary concerns in the financial markets. It's possible, if unlikely, that we could hit stagflation.

So, things are weird. Unfortunately for the rest of the world, these concerns aren't limited to the U.S. It had been thought that, since growth rates have improved in parts of W. Europe (e.g. Germany), and since Japan is finally showing some signs of life, the rest of the world had decoupled from U.S. But that might not be the case. Megan McArdle sums up thusly:

Germany and Japan may be growing, but they're extremely dependent on exports, which means they won't serve as the markets that fuel growth in the rest of the world. That, for too long, has been America's job. Now that we're ready for retirement, it seems we forgot to train our replacement.

Political Upheaval in Japan

Japanese Prime Minister Shinzo Abe suddenly announced his resignation. He was a proponent of close ties with the U.S., a stronger political and military presence in Asia, and a constitutional amendment to allow the use of Japanese military forces for non-defensive purposes. His was strongly criticized by China and other regional powers for this stance, and his popularity has sunk in his own country, which seems more concerned with Japan's economy in general, and with the ability of the government to live up to its pension commitments to its elderly in particular. The nation has aged in recent decades, and the economy has stagnated. The repercussions from his resignation may lead to widespread reorganization of the government, and a clear shifting of mandate.

It's possible that a similar political situation may face the United States in coming decades. We'll have to wait and see.