U.S. EXPORTS GAIN AN EDGE
They're rising around the globe
For watchers of the U.S. economy, one of the biggest surprises of 1995 was the sharp turnaround in the trade deficit. Early in the year, the omens were anything but positive. Japan, America's second-largest customer, was mired in recession. Mexico, its third-largest, was in economic collapse. Yet U.S. merchandise exports rose by close to 15% during the year, and the deficit, aided by a drop in imports, has been shrinking steadily since July.
The big question is whether exports can continue to provide enough fuel to shore up a sluggish U.S. domestic economy in the months ahead. One economist who thinks the answer is yes is Joseph P. Quinlan of Dean Witter Reynolds Inc., who points out that U.S. exports are extraordinarily diversified in terms of both products and markets.
Unlike other countries, the U.S. is a major exporter not only of capital goods and industrial materials but also of agricultural products. Indeed, all three categories posted double-digit increases last year, with agricultural products up some 22%, to a record $50 billion-plus.
Meanwhile, the U.S. has been successful in diversifying into emerging markets in Asia, Latin America, and elsewhere. In 1990, such markets accounted for 35% of U.S. merchandise exports, compared with 42% going to Europe and Japan. But, by last year, the emerging-market share was up to 42%, vs. 34% for Europe and Japan.
Just as important is the rise in U.S. competitiveness stemming from years of productivity investments and restructuring. Indeed, double-digit increases in U.S. exports to sluggish European and Japanese economies last year underscore the enhanced competitiveness of U.S. products. All of this suggests that U.S. exports are well positioned to sustain the expansion this year. Despite the stronger dollar and weak European economies, says Quinlan, "even modest growth in the world economy should bolster our trade performance."BY GENE KORETZReturn to top
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THE FORBES EFFECT ON GOLD
Its fortunes seemed to rise with his
With labor costs hardly rising and materials prices falling, the consensus among the experts is that the runup in gold prices has little significance as a precursor to inflation. So why has gold surged higher? Aside from the usual explanations, such as a shift in forward selling by gold producers, economist Sam Nakagama of Nakagama & Wallace Inc. sees a political connection.
Noting that gold took off as Steve Forbes began to gain ground in public opinion polls, Nakagama think it's hardly a coincidence that Forbes is a long-time advocate of a return to the gold standard. Since Jack Kemp and other supply siders share this view, Nakagama thinks Forbes's prominence has turned some gold bugs bullish about the likelihood that the metal will receive strong support at the Republican convention.
Gold prices have slipped recently, and so has Forbes's popularity--giving some credence to Nakagama's thesis.BY GENE KORETZReturn to top
A PAUSE THAT REFRESHES?
Recession fears may be excessive
According to the experts, a spate of dismal economic reports--from sagging consumer confidence and rising jobless claims to weak export orders and home sales--suggests that the economy will come perilously close to posting negative growth in the first quarter.
Stephen S. Roach of Morgan Stanley & Co. isn't worried, however. "Every economic expansion in the entire post-World War II period," he points out, "has been interrupted by one quarter of outright decline in GDP." And in each expansion, he adds, the temporary drop in economic activity was followed by a quick resumption of growth that typically lasted for several years.
In the spring of 1986, for instance, the economy contracted by 0.3%--leading the Fed to ease aggressively as inflation fell in the wake of collapsing oil prices. By early 1987, however, growth had spurted back to 4% and inflation was climbing rapidly--suggesting that the Fed had merely added fuel to a rebound that was already under way.
As Roach sees it, the economy is currently experiencing a similar classic "midcycle pause." Indeed, he feels that the economy is in a better position to bounce back this time, with the consumer debt service burden no higher than in 1986, productivity growing faster, and the dollar and real long-term interest rates far lower.
If Roach is right, the danger is not that the Fed will ease too little in the months ahead, but that it will ease too much--laying the groundwork for a sharp pickup in growth once the current inventory correction is completed--and an abrupt return to monetary restraint.BY GENE KORETZReturn to top