While the U.S. economy is far from robust, it is now enjoying the fastest growth in the industrialized world. But there's a downside: America's merchandise trade deficit has just posted the largest two-month gap in five years, and trade will remain a drag on the economy well into 1994.
Through the first quarter, the U.S. economy has grown 2.6% from a year ago, while the remainder of the G-7--the world's seven largest industrial powers--has watched their economies decline at a 0.4% pace. As a result, a growing appetite for imports, along with sagging foreign demand, has cut deeply into the U.S. recovery. Without the widening trade gap, U.S. growth would have been a full percentage point faster.
The latest bad news: That drain on growth continued in the second quarter. After posting a deficit of $7.9 billion in February, the gap exploded in March, to $10.5 billion--a four-year high. Most analysts expected a shrinkage in April, back to its six-month trend of about $8 billion. Instead, the deficit remained at $10.5 billion.
This deterioration may well explain part of the manufacturing sector's recent sluggishness. Orders for durable goods fell by 1.6% in May, their third consecutive decline (chart). May unfilled orders dropped 0.9% to their lowest level since November, 1988, mainly reflecting a shrinking backlog in the aircraft industry.
You would expect manufacturing to share in, if not lead, the recently improved tone of the economy. The Federal Reserve's latest summary of economic conditions says that "business activity was increasing at a slow to moderate pace" in most of the 12 Fed districts in May and early June. Also, the report says that manufacturers anticipate a moderate expansion.
But right now, factories are getting hit from a number of sides. Retailers are working down their excessive inventories that had built up during the winter storms, and so they are ordering less. Uncertainty over taxes and the unexpected loss of the proposed investment tax credit are also depressing demand. And defense cuts are a continuing drag.
On top of all that is the growing problem with foreign trade. U.S. manufacturers depend on foreigners to buy about one-fifth of their output, but weak growth overseas is taking away some of that demand. At the same time, imports are grabbing a record 24.3% of U.S. demand for goods other than oil.
Skewed world growth, and the policy cooperation needed to reduce its drag on the U.S., will be high on President Clinton's agenda when he attends the G-7 economic summit in Tokyo on July 7. Clinton would like to see Japan spend more to stimulate its economy, and he would like lower interest rates in Europe. Both wishes are aimed at spurring foreign demand for U.S. goods.
But even if Clinton got his way, the world economy still would be far from a solid recovery. Japan already has put together a huge package of fiscal stimulus, but it will take time to work. Also, the yen's 15% appreciation against the dollar since January will take a year or more to influence trade flows between the two countries.
Recent data from Japan, including the third consecutive monthly gain in the index of leading indicators, suggest that the Japanese slump may bottom out in the second half of this year, but few international analysts expect the economy to pick up steam until 1994.
The same is true for Europe, which is in far more trouble than Japan. Although Britain is slowly recovering, Continental Europe is succumbing to the pressure of high German interest rates. Germany is trying to juggle the costs of unification and unacceptably rapid growth in both money and inflation against the flagging economy's need for lower interest rates.
The result is Germany's worst recession in more than 30 years. And the rest of Europe is stuck with 11% unemployment, with no hope for a rapid turnaround. That's because European governments face large budget deficits and do not have Japan's fiscal flexibility. That leaves monetary policy to provide stimulus, but Germany, which usually leads Europe out of recession, is cutting interest rates only grudgingly.
The export side of the U.S. trade ledger still looks favorable, but not nearly as positive as it did last year (table). Exports dipped by $500 million in April, to $38.4 billion, reflecting broad declines. Through April, exports are up 3.2% from the same period in 1992, but a year ago, they were growing by 6.8%. Export growth has slowed in almost all major regions. Only the rapidly growing Pacific Rim countries, excluding Japan, have accelerated their purchases of U.S. goods.
Exports to Europe, however, have declined by 3.8%, and shipments to Japan are off 1.8%. Europe and Japan buy one-third of America's exports. But more discouraging is the steep falloff in the growth of exports to South and Central America. Shipments are up by 8.4% from last year, but in 1992 they grew at a 25% clip, accounting for a big chunk of U.S. export growth.
The overall export slowdown reflects weaker demand for U.S. capital goods other than automobiles. Food and beverage shipments also have slowed sharply. Auto exports, though, are holding up well. Through April, they are up 17.7% from a year ago, about the same as last year's 18.7% pace.
For the rest of the year, exports are likely to keep growing, but considerably slower than their 1992 pace. Exports to Canada, Latin America, and the Asia-Pacific countries will supply the support, as Europe and Japan try to free themselves from the grip of recession.
The real trouble brewing in the trade outlook, however, is imports. Because of the export slowdown, the negative impact on the trade deficit of America's seemingly insatiable hunger for imports is all the more visible. Foreign goods are coming ashore nearly three times as fast as exports are going out (chart).
After surging $5.2 billion in March, to a record $49.3 billion, imports fell back by only $500 million in April. Imports are likely to retrace more of their recent strength in May. One hint of that: Customs duties, after seasonal adjustment, dipped by 7% in May. But the uptrend of import growth remains disturbingly steep.
All major import categories in April stayed near their high March levels. As a result, price-adjusted imports began the second quarter some 19% above their first-quarter average, at an annual rate. That implies that nonoil imports' share of U.S. spending on goods, already at a record, rose even more in the spring period.
In particular, the import surge has sliced in half America's once-sizable trade surplus in capital goods. That reflects the increasing market share that foreign-made high-tech equipment is grabbing during the current boom in U.S. capital spending for such items.
Imports are coming ashore at a faster clip from all major regions (table). Through April, purchases of foreign goods are up 10.5% from a year ago. For the newly industrialized nations along the Pacific Rim as well as Latin American nations, the continued rise follows double-digit gains in 1992.
Those increases may yet turn out to be good for the U.S., since these developing countries also have been large buyers of American goods. When producers in Brazil, China, Mexico, and Singapore export goods to the U.S., they in turn earn the hard currency needed to import more American-made heavy machinery and electronics necessary to build up their industrial bases.
For now, though, the U.S. export machine is all revved up with no place to go. After the cost-cutting and productivity enhancements of recent years, combined with the current highly competitive exchange value of the dollar, U.S. manufacturers will have to hang on while the rest of the industrialized world catches up.