Decoupling

With European and Asian markets falling in the past several days on fears of a U.S. recession, some pundits (such as Stephen Pearlstein in the Washington Post today) have been quick to proclaim that fears of “decoupling” (the belief that the U.S. economy has less impact on other economies than in the past) were overly eager.  Yet, no matter the verity of decoupling, observers must look beyond financial markets’ - which are clearly and necessarily pricing in fears about growth - 2-day returns and to economic indicators such as GDP.  The true measure of decoupling will be trade and investment flows (and thus GDP) in coming quarters.  And, while full-fledged decoupling is unlikely, the relative, secular decline of U.S. GDP as a percent of global output means that the correlation between American growth and that of other economies should weaken.