AMERICA'S IMPORT APPETITE WILL WEIGH DOWN THIS YEAR'S GROWTH
The U.S. has the fastest-growing economy in the industrialized world. Now for the bad news. America's voracious appetite for imports, combined with weak demand overseas, means that foreign trade will be a big drag on U.S. growth in 1994. Last year's wider trade deficit robbed nearly a percentage point from the economy's 3.2% growth rate, and the damage this year is shaping up to be just as bad.
Further erosion in the U.S. trade position this year is sure to heighten trade tensions, especially between Washington and Tokyo. In the '90s, access or denial to markets is becoming crucial as economic power supplants military power as the driving force in the new world order.
The trade gap got off to a bad start in 1994. Using the Commerce Dept.'s new monthly data, which now include services instead of goods only, exports fell short of imports by $6.3 billion, up from $4.1 billion in December. All of the January deterioration occurred in the trade deficit for goods, which widened by $2.3 billion, to $11 billion (chart). The trade balance for services, which is in surplus, was little changed from December at $4.7 billion (table).
The U.S. trade deficit with Japan shrank in January, but it still accounts for about half of the overall gap. Further slow progress may be on the way, though, helped by the sharp rise in the yen since February. The latest Japanese data suggest another small drop in February.
The overall U.S. deficit in January, adjusted for prices, appears to be greater than the fourth-quarter average. That means trade is shaping up as a drag on first-quarter growth in real gross domestic product.
The bond market took heart from that when the data were released on Mar. 22, because it saw the wider trade gap as a sign that the economy was in less danger of generating inflationary pressures. But bond players were even more encouraged later in the day, when the Federal Reserve announced during its regular policy meeting that it was going to hike interest rates again.
The Fed lifted the federal funds rate on overnight loans by another quarter-point on Mar. 23, to 3.5%, after a similar move on Feb. 4. The hike was widely expected. After the White House summoned Fed Chairman Alan Greenspan to an unscheduled meeting of economic policymakers on Mar. 18, the markets concluded that the Fed would have to tighten soon in order to avoid the impression that the Administration was influencing monetary policy.
That perception would have rattled the bond market even more. Instead, the yield on 30-year Treasury bonds dropped to 6.85% on Mar. 22 from 6.96% the day before.
Following the Fed's move large money-center banks lifted their prime lending rates on Mar. 23 by a quarter point to 6.25%. Also, the dollar generally strengthened, and stock and bond markets outside the U.S. rallied, especially in Latin America and Asia, where markets had been hit hard by the uncertainty following the Fed's earlier rate hike.
The weaker January trade data reflected a steep drop in exports of goods, while service exports were unchanged. Foreign shipments of goods fell a record $2.7 billion, to $38.7 billion. A large shipment of aircraft in December had swelled that month's exports, sharply shrinking the goods deficit and contributing to the big revision in fourth-quarter real GDP. January exports settled back down to a more sustainable level.
Imports edged lower in January, but looking ahead, the main trouble with trade in 1994 is the steady wash of foreign goods hitting U.S. shores. Excluding petroleum, the rising share of domestic demand taken by imported goods, at 24.5% last quarter, shows no sign of waning.
Europe's struggling econ-omies are increasingly directing their exports to U.S. markets, but the fastest growing source of U.S. imports is the developing nations, especially China, the Pacific Rim, and Latin America. Foreign goods from these countries are growing three times faster than imports from the major industrialized nations.
The capital-goods sector shows how domestic demand works like a vacuum to draw in imports, even as the ongoing U.S. capital-spending boom is powering output of durable goods at home. New orders for such goods fell 2.5% in February, following six gains in a row (chart).
The February weakness in orders was not broad. A drop in aircraft bookings accounted for all of the decline. Excluding planes, orders and shipments both rose. Also, bookings so far this quarter are running 5.2% ahead of the fourth-quarter level, suggesting plenty of momentum in the manufacturing sector.
Orders for capital goods, excluding aircraft and defense, rose a strong 5.3% in February, and they are up 20.2% from a year ago. In response to this capital investment boom, U.S. makers of computers, heavy machinery, and parts have been pumping up output.
Foreign manufacturers, however, are also grabbing a big slice of the pie. Imports of capital goods, outside of autos, have soared by 22% from last year, while exports are up a solid, but smaller, 12%.
That disparity in growth between capital-goods imports and exports illustrates a crucial reason for the worsening U.S. trade deficit. Indeed, lost amid the saber rattling of the protectionist Super 301 guidelines and most-favored-nation status is the simple fact that the U.S. trade position has deteriorated because our economy has been expanding while many other industrialized nations are still in slumps.
What has saved U.S. exports, which are up by 5.4% in the year ended in January, is the demand from countries outside of Europe, Canada, and Japan. During the past three years, exports to the other countries that make up the Group of Seven--Japan, Germany, Canada, Britain, France, and Italy--have grown at an annual rate of only 0.6%. Shipments to the rest of the world have risen at a 7.6% pace (chart).
Not surprisingly, the G-7 countries have all gone through recent recessions that cut their demand for all imports, not just U.S. goods. For this year, the G-7's economic fortunes are decidedly mixed, and that will slow U.S. export growth.
Canada and Britain are well on the road to expansion, but Japan and Germany face particularly tough times. Japan's real gross domestic product fell at a 2.2% annual rate in the fourth quarter and was flat for all of 1993. Germany saw an uptick in growth in the middle of 1993 but probably slipped back into recession at yearend.
Japan's best hope for growth this year lies in its fiscal-stimulus programs, including a one-year tax cut and more government spending on housing and infrastructure. Germany will have to wait for the Bundesbank to cut interest rates further. The Buba did trim a key rate slightly on Mar. 23, but more substantive cuts in the important discount rate are likely before midyear.
Even so, both Germany and Japan are unlikely to start growing until the second half of 1994 (page 48). More important, both nations must face the social and political problems of streamlining their workforces, which could hamper consumer spending even into 1995.
That's why U.S. exporters will find greater demand in the dynamic economies of Southeast Asia and Latin America. The Organization of Economic Cooperation & Development forecasts that the newly industrialized Asian nations will grow by more than 6% in 1994, and the Latin American economy will rise by 3.5%.
Increased demand from these countries will certainly lift industrial output in the U.S. The faster uptrend in imports, though, means that the foreign-trade sector will remain a significant drag on economic growth this year.JAMES C. COOPER AND KATHLEEN MADIGAN