John Sondey

Matthew Diersen

English

Research Papers in Economics

____________ 
Contact the author at john.sondey@sdstate.edu or 605-688-4141. 
 
            E C O N O M I C S 
   C O M M E N T A T O R 
South Dakota State University      No. 514                        January 31, 2010
 
DECOUPLING AND 
RECOUPLING: GLOBAL 
LINKS TO THE US BUSINESS 
CYCLE 
 
by 
 
Dr. John A. Sondey 
                               Professor, Economics 
 
The Great Recession of 2007-2009 illustrates the 
brave new world of globalization has altered the 
scenario of events that evolve when a severe 
recession originates in the developed world.   The old 
script holds that when the US economy sneezes, the 
rest of the world catches cold.  Therefore, when the 
US housing bubble burst and its stock market 
plunged, it was expected that the other nations of the 
world would suffer at least equal economic shrinkage 
as their exports to the US fell precipitously. Note that 
the operative word here is “altered” – modified or 
revised, not radically changed.   
 
Decoupling 
Decoupling is a relatively new concept which 
proposes that changes in the US economy (recession, 
boom) affect trading partners to a lesser extent today 
than was the case in the twentieth century.  
Decoupling affects all markets; both direct productive 
activity and financial. The theory of decoupling is 
based in large part on the changing structure of world 
economies, particularly emerging markets, but also 
developed European economies.  Financial and output 
markets in emerging nations are becoming less 
susceptible to gyrations in the US economy because 
domestic consumption is growing faster than exports 
(and faster than consumption in the US as well) and a 
smaller percent of developing country exports are 
sold to the developed world and a larger percent to        
(Continued on page 2) 
 
CATTLE MARKET 
FUNDAMENTALS 
 
           by 
 
Matthew Diersen 
Professor/  
Extension Specialist 
 
 
Cattle operations are common in South Dakota and 
they contribute to the agricultural economy.  
Relatively high input costs have kept cattle 
inventory levels contracting across the United 
States.  The situation in South Dakota is similar, but 
subtle differences suggest slightly different 
responses to changing market conditions by cow-
calf producers and feedlots. 
 
National Picture 
At the national level producers continue to contract 
beef herd numbers resulting in lower inventory 
levels.  In the Cattle report, the National 
Agricultural Statistics Service (NASS) reported that 
as of January 1, 2010 there were 93.7 million head 
of cattle in the U.S.  The general trend of fewer 
cattle has not been mirrored in South Dakota.  After 
several years of unchanged inventories the total 
number of cattle increased to 3.8 million head as of 
January 1. 
 
Most states bordering South Dakota have smaller 
overall inventory levels and fewer beef cows.  Most 
major cow-calf states had smaller beef herds as of 
January 1.  Oklahoma was a notable exception.  
Thus, contraction is widespread and persistent. 
Based on slaughter data and on-feed statistics, 
analysts expected steady to fewer beef cows and 
fewer beef replacement heifers. 
(Continued on page 3)  
 
(The Continuing Case for ….  Cont’d from p.1) 
other developing nations. Also, as emerging 
economies and incomes grow, their securities are held 
by a broader cross-section of international investors – 
and, diversification of holdings over a broader 
investor base tends to reduce stock market volatility 
while raising share prices.  
 
East Asian economies have adopted a cornerstone of 
classical economics; which focuses on capital 
accumulation via savings as the means of growing the 
wealth of nations. For instance, Singapore mandates 
that high wage employees/employers contribute more 
than 50% of a worker’s gross pay to a fully-funded 
(not pay as you go) government program which 
invests the monies largely in domestic corporations, 
thereby helping to solidify a national savings rate in 
excess of 50%.  This tight, positive correlation 
between national savings rates and economic growth 
provides a widely held cornerstone of developmental 
economics.  In fact, Akerlof and Schiller (2009) view 
savings as a national exit route from poverty and 
underdevelopment. 
 
Europe’s hypothetical road to decoupling from the US 
economy is distinct from Asia’s and hinges on 
structural differences and reform initiatives.  First, 
liberalization of labor markets and business 
regulations would encourage employment, 
profitability, and economic growth. Concurrently, 
relatively high social welfare safety nets would be 
able to sustain consumption and modulate any decline 
in recession-induced production. In Japan, a 
reformed, sounder bank system, heightened 
consumption, and reduced reliance on export-led 
growth would help separate her from the constricting 
US economy. 
 
Recoupling 
Advocates of the decoupling theory controlled the 
playing field until the last quarter of 2008, when they 
were put to rout by the grinding halt of the global 
economy. Prior to the halt, some economists were of 
the mind that emerging economies had transformed 
into the engine of growth for the global economy 
(FT.com, 08/10/09). Surging demand and positive 
economic growth in developing nations would offset 
the recession and indebtedness, negative GDP 
growth, and reduced import demand in the US and the 
rest of the developed world.   
After the meltdown of Lehman Brothers in 
September 2008, international capital flows were 
reduced, trade finance became more difficult and 
emerging economies felt the full brunt of the now-
global recession.  Asset values and national output 
began falling more precipitously in developing 
economies than in the industrialized world. 
Recoupling replaced decoupling in the railroad 
yards of international commerce, and the recession 
in industrialized nations spread quickly and deeply 
into emerging markets. “Two thousand and eight 
will be the year of “recoupling,” stated Peter 
Berezin, an economist at Goldman Sachs in 
attempting to clarify his firm’s 180 degree change 
of course.  “What began as a US specific shock is 
morphing into a global shock.” (Bloomberg.com, 
12/7/08). 
 
Changed Relationship of US v. ROW 
When the US economy quickly slipped into 
recession in the second half of 2007, other world 
economies, developed and less developed, 
maintained positive economic growth. The fallout 
from the housing market bubble was largely 
contained within the US.  Within a year, this rosy 
scenario had changed. Other developed nations, 
mainly the EU, began economic shrinkage.  
Emerging economies, once above the fray, 
experienced declining or negative economic growth 
as well as plunging stock markets. In 2008, the US 
mortgage loan-generated crisis spread globally and 
virtually no economy was immune to its negative 
effects. 
 
In the past, a US economic slump became 
immediately contagious abroad. This time, US 
recessionary effects were transmitted with roughly a 
year’s lag.  It should be noted that the US economy 
remains the dominant world economy.  US 
consumption exceeds that of the entire Asian 
economy, while US imports alone are roughly equal 
to the GDP of China.  The US stock market 
constitutes about 45% of global market 
capitalization, down from 55% a decade ago.  But 
the reality is that emerging markets are growing 
much faster than the US economy and the US share 
of global output and market valuation has been 
diminishing. 
  
 
The Dallas Fed notes that the proliferation of 
international economic linkages reduces nations’ 
immediate economic dependence on the demand of 
US consumers to absorb their excess production, but 
it does not necessarily alter longer term dependence; 
e.g. China may sell more consumer products to the 
European Union and perhaps less to the US.  
However, depressed recessionary demand in the US 
for European output may ultimately restrict the EU’s 
imports from China.  The global economy simply 
cannot ignore the effects of recession in the US; 25% 
of world output (and a larger percent of world 
consumption) will ultimately affect global demand 
and incomes.  What globalization has achieved is a 
delay of the negative global impacts of US recession.  
 
The Dallas Fed tracked US cyclical movements in 
moving windows of 80 quarters from 1960 to 2007, 
using variations in real GDP as the variable metric, 
against fluctuations experienced by 11 other countries 
including: Canada, Japan, Belgium, Denmark, 
Netherlands, Korea and Spain. Data restrictions 
precluded similar comparisons for Mexico and China.  
The correlation, in the immediate run, between US 
cyclical fluctuations and the business cycles of EU 
members, has been decreasing over time (1960-2007).  
Also, the direct impact of US cyclical fluctuations on 
non-EU members (Canada, India, Japan, and South 
Korea) has also been diminishing over time, 
particularly since 2000.  The demise of the Bretton 
Woods fixed exchange rate system, oil price shocks, 
trade liberalization and technological advance have 
all contributed to globalization, which lessened the 
immediate effects of changes in the US economy on 
global economic welfare.  (Economic Letter, Dallas 
Fed., Nov. 2008). 
 
However, the same Fed study indicates that the 
impact abroad of US economic changes may actually 
be building – over the longer run.  That is, it takes 
longer for fluctuations in the US economy to affect 
other economies, but the effects may be deeper than 
prior to 1980.  Globalization means that economies 
are more open to economic shocks today and that 
those shocks, reverberating among trading partners, 
may become stronger – while the full impact takes 
longer to arrive. The appearance of decoupling is 
transitory, while the transmission mechanism for 
economic shocks has become more sophisticated – 
affecting economies from different directions. 
Investment Impacts 
It stands that the decoupling process is an 
incomplete one and that swings in the US business 
cycle still affect foreign economies, both developed 
and developing. However, globalization has altered 
the timing of impacts and, likely, their severity as 
well.  Some emerging economies, notably Brazil, 
China and India have exited the current financial 
crisis and afford investors greater medium-term 
growth than industrialized (actually, post-industrial) 
economies. Consequently, select emerging markets 
are currently likely to offer investors a better risk-
return tradeoff via less downside risk and more 
upside return because of their V-shaped recovery 
from the current global recession (F.T.com, Aug. 
10, 2009). 
 
Reference 
Akerlof, George A. and Robert J. Shiller. Animal 
Spirits: How Human Psychology Drives the 
Economy and Why It Matters for Global 
Capitalism.  Princeton, NJ: Princeton University 
Press, 2009. 
 
***************************************** 
(Cattle Market Fundamentals ….Cont’d from p. 1) 
 
The Cattle report confirmed analysts’ expectations.  
The slightly smaller cow herd will be partially 
offset by the slight increase of heifers expected to 
calve in 2010.  However, replacements overall are 
2% lower than last year.  Smaller calf crops are thus 
expected for 2010 and 2011, ultimately reducing the 
potential supply of beef in 2011 and 2012. 
 
The short run price situation is mixed.  Nationally 
there are fewer cattle currently on feed, and slightly 
fewer feeder cattle outside of feedlots.  However, 
there are more feeder cattle grazing southern wheat 
pastures.  Generally once those feeder cattle are 
placed on full feed they have larger frames and 
finish at relatively higher weights. 
 
South Dakota Differences 
The overall higher South Dakota cattle inventory 
level masks some subtle changes compared to other 
states.  In South Dakota the number of beef cows 
has fallen slightly for four consecutive years.  The 
beef replacement heifers, calf crops and on feed 
levels have been steady.    
 
 
 
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The increase in total inventory is driven by feeder 
cattle outside of feedlots.  This group is the sum of 
calves, steers and other (non-replacement) heifers 
minus the number of cattle on feed.  This group 
reflects the flexibility South Dakota producers have.  
A late crop harvest may have resulted in more 
feedstuffs and generally delayed some cattle sales 
until 2010. 
 
Additional replacement heifers could be developed 
from this reserve inventory.  The lighter animals 
could be grazed on summer pasture in South Dakota 
or in neighboring states.  Some substitution of 
yearlings for stock cows is thus possible in 2010.  
Because the neighboring states did not expand their 
inventories, there could be surplus grazing available.  
The heavier animals could be placed on full feed 
using any excess feedstuffs from the late crop harvest. 
 
The on-feed situation also reveals some trends 
specific to South Dakota.  At the national level there 
are 13.6 million head on feed, down 2% from 2009.  
The January Cattle on Feed report showed the same 
absolute decrease among feedlots with more than 
1,000 head, suggesting smaller feedlots across the 
U.S. have the same number on feed.  The state-level 
breakdowns reveal that the largest feedlot states have 
smaller inventories as do most of the very small 
feedlot states.  In contrast several states in the upper 
Midwest, specifically Iowa, Minnesota, Michigan and 
South Dakota, have a larger number on feed this 
year.  The long-run trend on cattle feeding in South 
Dakota continues to show a strong seasonal pattern 
in monthly placements and a relatively smooth 
pattern in monthly marketings.  Average monthly 
placements are three times higher during the peak 
month of October than during the trough month of 
July. 
 
The prospects for the remainder of 2010 will 
depend on how the different market forces come 
together.  Cattle profits will likely improve because 
of a smaller national cattle supply, lower hay prices, 
and stabilized grazing fees.  The short-run feedlot 
situation continues to be tenuous, but the second 
half of 2010 should be profitable because of tighter 
supply.  There should be higher demand for grass 
cattle this summer (and thus higher prices).  By fall 
the smaller expected calf crop should result in 
higher calf prices than observed in 2008 and 2009.  
Finally, backgrounded cattle held into 2011 should 
also command higher prices (though returns will be 
dependent on corn prices). 
 
********************************************************** 
ECONOMICS COMMENTATOR 
******************************************************************************** 
Department of Economics       
South Dakota State University        Phone: 605-688-4141 
Box 504   Scobey Hall              Fax:     605-688-6386 
Brookings, SD 57007-0895            E-Mail:Penny_Stover@ sdstate.edu 
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Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

DECOUPLING AND RECOUPLING: GLOBAL LINKS TO THE US BUSINESS CYCLE; CATTLE MARKET FUNDAMENTALS

http://repec-sda.sdstate.edu/repec/sda/pdf/Commentator/No514.pdf

DECOUPLING AND RECOUPLING: GLOBAL LINKS TO THE US BUSINESS CYCLE; CATTLE MARKET FUNDAMENTALS

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