US and EMU IP in MFG track each other’s respective paths. The world economy clearly is very tightly connected. One up shot of this is that there is not as much gain from diversification as in the past. Of course we are comparing two real flows of output. Inflation in the US does differ from inflation in the Zone and the more important difference is that the US dollar/euro exchange rate continues to be volatile despite relatively closely correlated MFG output.

While there is a lot of concern about the MFG slowdown in the US and in Europe it appears that the two episodes have a lot in common although much of the discussion seems to cite separate factors for each slowdown. Maybe the common factors are the more important ones?

It is possible that the US and EMU have a lot of factors in common but that each also has a few separate factors operating at the same time. In Europe, the uncertainty on the debt front is a key issue there. It may have some impact on the US but it is not as big an effect on the US economy. But the US has its own debt situation that is exaggerating uncertainty, too. While these two debt issues are ‘separate’ they are certainly linked at least in the sense that the US is seeing in Europe’s experience the sorts of things that can happen if debt is allowed to compound unimpeded. Japan’s devastating shocks hit both the US and Europe, further connecting the two MFG sector’s oscillations. High oil prices hit the US and Europe together but hit the US harder than Europe since its energy costs are lower and the hike in the market prices hits US consumers harder as a larger percentage hike. On balance there are a mix of similar and yet different factors that are buffeting the US and Europe.

The more we drill down into this issue, the more we see that there are a lot of commonalities in the US and European economies. Though, separated by a great ocean these modern economies are still quite interdependent.