Business Outlook: U.S. Economy
U.S.: Exports Rebound, but Barely Dent the Trade Deficit
Consumer spending and rising oil prices keep imports surging
Will the U.S. trade deficit finally begin to narrow in 2000? After all, overseas economies are picking up smartly, and U.S. exports are already benefiting. But before you get too optimistic, consider this. The volume of U.S. imports is 30% larger than its exports. That means exports will have to grow 30% faster than imports just to keep the deficit from widening further.
The record November trade gap made that point ever so clearly. Exports of goods and services rose a healthy 0.7% from October, but imports, up 1.4%, increased twice as fast, widening the monthly deficit by nearly a billion dollars, to $26.5 billion. In the most recent six months, exports have picked up sharply, growing 6.4% after declining during the previous half year, but imports are up 10.1% (chart).
For all of 1999, the deficit is on track to total an estimated record high of $258 billion, up from $164 billion in 1998. For 2000, expect a slower rate of deterioration, but a further widening nevertheless seems likely. Export growth is set to accelerate now that a global recovery is firmly in place. However, consider that imported goods now account for about one-third of all nonoil goods bought in the U.S. That means it would take a considerable slowdown in domestic demand to cut deeply into import growth. But there is little sign of that, especially from U.S. consumers, whose confidence soared to a record level in January.THERE'S A DANGER: At some point, possibly this year, the sustainability of the deficit--and the current level of the dollar--are likely to come into question. Specifically, the global financial markets may question the ability of the U.S. to finance its resulting external debt with foreign capital, especially with the recovery in the rest of the world offering increasingly attractive returns on investment relative to those in the U.S.
In the fourth quarter, the U.S. current-account deficit appears to have totaled a record 4% of gross domestic product. And it will go higher. The current account not only encompasses the export-import deficit, which will be pushed up in 2000 partly by higher oil prices. It also includes the rapidly growing net interest payments that the U.S. must make on its growing external debt. Higher interest rates in the U.S. this year will only increase the financing burden.
The import flood is coming from all directions, and it's not just the result of higher oil prices. During the past year, foreign goods from all Pacific Rim countries, including China and Japan, are up sharply, accounting for a third of the increase in all imported goods.
Imports from the newly industrializing countries of the Pac Rim are up 20.6% in the past year. That's a rapid acceleration from this time last year, when imports from across the Pacific were falling, as the export machines of those countries sputtered after the Asian financial crisis. Another third of the past year's import growth has come from cross-border trade with Canada and Mexico, and another fourth comes from Western Europe.
Among categories of goods, imported oil accounted for less than a fourth of the U.S. bill for imported goods during the past year. However, the recent spike in oil prices will likely pump up the December and January import numbers, in part because a more normal winter in the U.S. is lifting energy demands.
Growth in consumer and capital goods will continue to lead import growth in 2000, especially since consumers remain on their spending spree. Indeed, the Conference Board's index of consumer confidence hit a record 144.7 in January, up three points from December (chart). Households gave high assessments of both present and expected economic conditions.
Buoyant job-market conditions, along with heady stock prices, are the key reason for consumers' optimism. The Conference Board said a record high 54.2% of households said that jobs were "plentiful," while a record low 11.3% said that jobs were "hard to get."EXPORTS SEEM TO HAVE shaken off the stagnation brought about by the global financial chaos that started in Asia in 1997. Exports of goods and services have managed to rise in five out of the last six months. They hadn't strung together such a consistent up trend in two years. Even adjusting for price changes, merchandise exports in November were up 8.5% from their year-ago level. The nation's purchasing managers report that export orders are back to their mid-1997 levels.
Two trends brighten the outlook for exports even further in 2000: the dollar's lower level and strong global growth. Since July, the dollar has fallen almost 5% against the currencies of the U.S.'s major trading partners and 14% against the Japanese yen alone (chart). The dollar's decline will make U.S. exports a little more price-competitive this year.HOWEVER, THE GLOBAL PICKUP will play a greater role in boosting exports. That's not just because stronger overseas spending will increase demand for U.S. goods. It is also because, in order to compete in the new information marketplace, foreign companies will have to invest heavily in advanced technologies.
True, most computer accessories are produced outside of the U.S. But value-added products, such as software and Internet expertise, are still dominated by U.S. industry. Because such exports are harder to track than shipments of aircraft or machine tools, some of their growth may go unnoticed in the trade data. Look, instead, for these exports to contribute to corporate profit growth and the payroll numbers.
The global recovery will also help the often-overlooked export segment of services. Those exports, including transportation, business services, licensing fees, entertainment, and tourism, had been growing at a double-digit pace before the Asian crisis, only to falter in the face of overseas recessions. They started to recover at the end of 1998 and by November, 1999, they were growing at a respectable 5.2% yearly pace. As foreign economies pick up steam, growth for these exports should accelerate as well.
The optimistic outlook for high-tech and service exports does not mean that other industries will not benefit from stronger global growth. In fact, exports of industrial materials and consumer goods were the primary drivers of export growth in the second half of 1999. Since June, shipments of materials and nonauto consumer goods accounted for 63% of the total gain in merchandise exports, even though they account for only 35% of all shipments.
The world, however, is changing. And that means the future of U.S. exports lies in the goods and services where the U.S. has comparative advantage--that is, items that a nation can produce cheaper or better than anyone. And for 2000, at least, no one does the New Economy better than the U.S.By James C. Cooper & Kathleen MadiganReturn to top