American exporters from Dow Chemical Co. (DOW) to Hewlett-Packard Co. are preparing for a further decline in demand from Europe as the region’s deepening debt crisis threatens to derail a source of strength for the U.S. economy.
JPMorgan Chase & Co. cut its forecast for second-quarter growth to 2 percent from 2.5 percent last week, in part because of a deteriorating trade balance. Earlier this month, it lowered its third-quarter estimate to 2 percent from 3 percent, “with much of the downward revision accounted for by an expectation that the pace of export growth will slow,” chief U.S. economist Michael Feroli said in a June 1 research note.
U.S. exports to the 27-nation European Union dropped 4.8 percent in the year ended April, the worst 12-month performance since November 2009, Commerce Department figures show. By comparison, total U.S. exports were up 3 percent in April from the same time last year. The slump in Europe coincides with slowing growth in other major markets for U.S. goods, such as China and Brazil.
“The decline in Europe will weaken our exports over the long term,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. “We look for the trade deficit to widen not only to the euro zone but developing economies as well,” she said, consistent with their forecast that the U.S. economy will slow to just 1 percent growth by year-end from the 1.9 percent annual pace in the first quarter.
Weaker European sales are also reflected in outbound container volumes from U.S. East Coast ports, which fell 2.6 percent in April from a year earlier after a 0.9 percent drop in March, according to data compiled by Bloomberg News.
The decline in demand from Europe is just starting to show up in trade data because it typically takes three to six months for goods to be shipped after an order is placed, according to Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington.
“The shoe is going to fall on U.S. exports to Europe,” said Hufbauer, a former U.S. Treasury official.
European stocks were little changed as Spanish 10-year bond yields climbed above 7 percent for the first time since the creation of the euro amid fading optimism Greece’s election will calm the euro area crisis.
More Spanish loans went unpaid in April, according to data published today by the Bank of Spain, suggesting the country’s recession is forcing more companies and consumers into default.
Most U.S. stocks rose as optimism about Greece’s attempts to form a coalition government tempered concern about the surge in Spanish bond yields. The Standard & Poor’s 500 Index climbed 0.1 percent to 1,344.78 at the 4 p.m. close in New York.
Europe threatens to derail President Barack Obama’s goal, stated in his January 2010 State of the Union address, of doubling exports in five years. U.S. goods and services sent abroad totaled $2.1 trillion last year, up 33 percent from 2009. Exports accounted for 13.3 percent of U.S. gross domestic product last year, up from 10.3 percent at the end of 2005.
Overseas sales of goods from computer chips to airplanes have been a source of strength for the world’s largest economy as it pulled out of the worst recession since the Great Depression.
Exports have contributed 1.1 percentage points to growth on average since the third quarter of 2009, when the recovery began, accounting for almost half of the 2.4 percent average quarterly gains in gross domestic product, according to figures from the Commerce Department. By comparison, sales to overseas buyers boosted GDP by an average 0.8 point in the six-year expansion that ended in December 2007, as the economy grew at an average 2.7 percent annual pace.
The European Central Bank forecast this month that the 17- nation euro area economy will contract 0.1 percent this year before returning to growth of 1 percent in 2013.
“We do not anticipate any material improvements in the European region over the near term,” Howard Ungerleider, senior vice president for Midland, Michigan-based Dow Chemical Co., said at a May 3 investor conference. While he sees “encouraging signs” in Western Europe, the rest of the region “continues to clearly struggle with structural issues and debt constraints and is showing recessionary trends.”
Economists at Morgan Stanley in New York on June 15 cut U.S. GDP forecasts for 2012 and 2013 in part because of the intensification of the European debt crisis. The U.S. will expand 2 percent this year, down from a previous estimate of 2.3 percent, and 1.7 percent next year rather than 2 percent.
Overseas sales have helped drive manufacturing, which has been one of the bright spots of the U.S. since the expansion began three years ago. That may be starting to change.
Manufacturing grew at a slower pace in May as factories tempered production and pared inventories in response to weakness in the global economy, according to a June 1 report from the Institute for Supply Management. The ISM’s factory index fell to 53.5 after reaching a 10-month high of 54.8 in April. Readings greater than 50 signal growth. Its export gauge dropped to the lowest level of the year.
U.S. exporters probably can’t count on emerging markets to take up the slack left by Europe, as they have in years past. Over the past month, Morgan Stanley economists in Asia and Latin America have trimmed projected growth rates for China, India and Brazil.
“As a result, we’ve tempered our optimism about U.S. exports,” Chief U.S. Economist Vincent Reinhart said in a June 15 note to clients. Morgan Stanley forecast trade will add 0.15 percentage point to growth this year, down from a prior estimate of 0.3 point, as shipments overseas increase 4.2 percent rather than 5.7 percent. Next year, it estimates exports will grow 5 percent instead of 7 percent previously.
“Certainly if Europe blows up you are looking at large declines” for U.S. exports, said Jay Bryson, senior global economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “That isn’t our base-case scenario, but that’s not an insignificant risk.”
Some U.S. manufacturers see a dim future in Europe even if the crisis doesn’t turn into a full-blown meltdown.
“There is a good chance that in Europe, we end up with a Japanese decade,” David Cote, chairman and chief executive officer of Morris Township, New Jersey-based Honeywell International Inc. (HON), said at a May 21 conference in Longboat Key, Florida. He was referring to the Asian nation’s combination of recession, high unemployment and price deflation starting in the early 1990s.
In addition to the weaker demand, U.S. exporters will be hit by a weaker euro, which makes American goods more expensive in Europe, Peterson’s Hufbauer said. “It’s going south from where it is now, and that will hurt U.S. exports.”
The euro has dropped 4.1 percent against the dollar in the three months to June 15, the third-worst performance among Group of 10 currencies after the New Zealand dollar and Australian dollar. The euro traded at $1.2570 at 1:18 p.m. in New York.
The debt crisis and the possibility that Greece may withdraw from the euro area have caused “a lot of uncertainty in Europe,” Meg Whitman, chief executive of Palo Alto, California-based Hewlett-Packard Co. (HPQ), said in an interview last week. “Uncertainty is not business’s best friend,” said Whitman, who heads the world’s largest maker of personal computers.
Even so, U.S. trade is less vulnerable to Europe’s woes than some other countries that rely more heavily on trade.
A decline in exports “is a weight on GDP growth in the U.S., but this category is not large enough by itself to cause a sharp slowdown,” said Dean Maki, chief U.S. economist at Barclays Plc in New York.
Even within Europe, demand for U.S. products varies among countries.
Germany’s economy is “incredibly strong” and the U.K. is performing well, while Spain, Portugal and Eastern Europe “are still declining some,” Robert Dutkowsky, chief executive officer of Clearwater, Florida-based computer products distributor Tech Data Corp., told a May 22 investor conference. “It’s a whole variety of economies.”
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