WORLD GROWTH IS REVVING UP THE U.S. EXPORT ENGINE
Germany is in recovery--finally. Elsewhere in Europe, businesses and consumers are stepping to a more confident beat. Japan's economy may be bottoming out. And the newly industrializing nations are charging ahead. In the U.S., the pleasing strains of world growth are music to exporters' ears.
In fact, with global growth in sync and on the rise, it just may be that U.S. exporters in 1994 will enjoy their best year since 1988. Of course, because of increased imports, foreign trade still exerts quite a downward tug on the U.S. economy. In the first half alone, it subtracted more than two percentage points from economic growth.
Moreover, the foreign trade sector showed little improvement in June. The trade deficit for all goods and services hardly changed, at $9.4 billion, from $9.5 billion in May. Likewise for goods alone, the deficit stood at $14.2 billion compared with $14.3 billion. Merchandise exports rose 4.2% in June, a bit faster than the 3% advance in imports.
However, the trouble with trade is America's voracious appetite for imports--from Taiwanese semiconductors to Tuscan ceramics. So far this year, imports are growing at an astounding 25.9% annual rate, five times the 5.2% pace of exports.
The overall market share grabbed by nonoil imported goods jumped to nearly 26% in the second quarter (chart). Since the recovery began in 1991, that share has risen rapidly after barely growing in the late 1980s.
While reversing the trade imbalance may seem insurmountable, some recent developments suggest that the trade deficit will not be nearly as big a hindrance to gross domestic product growth in the second half as it was in the first.
One reason is that slower domestic demand, especially consumer spending, should curb the onslaught of imports into the U.S. That may already have happened in the second quarter, when the downshift in spending caused a huge buildup of wholesale and retail trade inventories. Many of those warehoused goods came from abroad. To pare down their stockpiles, retailers will be ordering less--not only from domestic manufacturers but from foreign suppliers as well.
The most recent sign that U.S. manufacturing is losing momentum is a sharp 4.2% drop in July durable goods orders, the largest in 21/2 years. Seasonal shutdowns in the auto industry and a drop in aircraft orders exaggerated the decline, but the weakness was widespread. Even if August bookings recoup all of the July loss, which is unlikely, third-quarter orders will still be below the second-quarter level.
One area of imports that isn't likely to slow much, though, is capital goods. A beneficiary of the U.S. boom in business investment, imports of capital goods are up 18% from a year ago. And with spending plans still flush for the rest of the year, foreign producers of heavy equipment and high-tech goods should continue to do well.
But at the same time, U.S. exporters will be busier, as renewed demand from a stronger Europe boosts their production schedules. Although Britain--America's biggest European customer--has been in recovery for some time now, the Continent was roiled by the recession in Germany. Now, however, all signs point to an upturn in Europe's biggest economy, paving the way for growth throughout the region.
Worldwide business optimism is clearly on the rise, says Dun & Bradstreet Corp.'s latest survey of more than 11,000 executives in 16 countries, with increasingly upbeat assessments for third-quarter sales, profits, and employment. Europe led the increase in confidence, following an even greater gain in the previous quarter, which was the largest jump since D&B began the survey in 1988.
Healthier demand from across the Atlantic is already translating into faster-growing sales of U.S. goods. New demand from Europe is a big reason for the acceleration. After tumbling for two years, exports to Western Europe have bounced back strongly since February (chart).
In better times, Europe purchased 25% of U.S. exports. Today, that share has slipped to 20%. Bringing the ratio back to prerecession levels could mean an additional $24 billion in exports in 1995. That's two percentage points on economic growth, although rising imports could offset that.
Across the Pacific, the news is not as optimistic. Trade talks between Japan and the U.S. have all the equanimity of the Major League Baseball talks, as the Sept. 30 deadline set by the U.S. for negotiations aimed at getting the Japanese government to buy more American goods draws near. In addition, the different near-term growth prospects between the two countries will not help to smooth out the problem.
In fact, Japan is caught on the fine line between recession and recovery, even as some U.S. industries are going full tilt (page 26). The strong yen doesn't help matters. True, it makes American goods cheaper in Japan, as well as more competitive against Japanese goods around the world. But because export-driven Japan is losing market share, its businesses are finding it difficult to launch a recovery there. And even with dismantled trade barriers, economic growth will remain the key to improving the bilateral trade balance.
In June, the U.S. trade deficit with Japan rose to $5.5 billion from $4.4 billion in May. And according to Japan's Finance Ministry, the deficit widened again in July, to $5.6 billion, the second-biggest gap on record. Since 1991, the U.S.-Japan trade deficit has swollen by 75.7%.
Is the U.S. at such a trade disadvantage with Japan? Not really. The data are exaggerated by the sharp weakening of the dollar against the yen. While the dollar-denominated trade deficit was widening during the past three years, the dollar itself was dropping by 34%, pushing up the value of U.S. imports and reducing the export tally.
The strong yen is hammering Japan's economy. Sure, in dollar terms, the Japanese surplus is still growing. But in yen terms, the surplus peaked in early 1993 and has been falling ever since, dragging down economic growth (chart).
In fact, because of the price advantage, American goods in Japan are doing quite well. U.S. exports there have increased a respectable 7.8% so far this year. But just as with other countries, the trade problem rests on America's imports from Japan--up 10.6% in the first half.
But even as U.S. purchases of consumer goods taper off, the total import bill may not fall by much. For one thing, the U.S. and many other countries will face higher fuel costs. The energy tab will look bigger if, as expected, crude-oil prices bounce back from their August dip.
Oil prices have picked up since March. OPEC is finally sticking to its production agreements, and political turmoil in Nigeria raises supply worries. From March until early August, the spot price for crude oil jumped 41.8%, to about $20 per barrel (chart). It has fallen $2 since then for seasonal reasons: a rise in North Sea production and a drop-off in demand from refineries, some of which are closed for yearly maintenance.
Prices probably won't stay down, though. With winter coming on and better growth worldwide, fuel demand will pick up. By the fourth quarter, world demand for crude is expected to outstrip supply by more than 2 million barrels per day, estimates the International Energy Agency.
But even as better world growth lifts America's energy bill, it will also grease the country's export machine. In fact, after years of cost-cutting and productivity enhancements, the coming year will be a time that U.S. manufacturers will relish. And at the same time, trade will shift from being a drag on economic growth to providing a lift that will help to keep the expansion rolling along.JAMES C. COOPER AND KATHLEEN MADIGAN