European manufacturing workers gain from the continued trade surplus, but lose from the general downward pressure on European wages and benefits as European governments attempt to fight slow growth with structural readjustment. They also lose from the increasing willingness of European companies to invest in the United States. Unions are forced to make more concessions. On the dollar side, U.S. growth continues for a while. At some point, U.S. consumers reduce their borrowing and spending.
Retail sales drop in the United States.
Production follows downward and the unemployment rate increases. Foreign investors who have been heavily investing the American stock market fear that a slowdown will depreciate the dollar. They sell off U.S. stocks, forcing the value of U.S. dollar to fall. The Federal Reserve reacts by raising interest rates. The drop in the dollar against the euro hurts the European trade balance.