Will Slumps Overseas Drag Down A U.S. Recovery?

To the gratification of economic observers who have been trumpeting the growing competitiveness of U.S. products in world markets, the most dynamic sector of the economy in the recessionary climate of the past 18 months has been merchandise exports. Despite relatively weak economic growth overseas, U.S. companies managed to rack up a 10% rise in real exports in 1991.

Whether that performance can continue, however, is the question haunting the Bush Administration. While exports helped limit the severity of the recession, they could well prove to be the Achilles' heel of the economy in the months ahead. "Without continuing strength in exports," says economist Sam Nakagama of Nakagama & Wallace Inc., "the coming recovery will be anemic at best."

One development clouding the outlook for U.S. exports is an apparent deterioration in export demand. Economist Maury N. Harris of PaineWebber Inc. points out that export order growth, as measured by order trends reported in the monthly survey of the National Association of Purchasing Management, recently hit its lowest two-month level in several years.

Meanwhile, foreign economies are slowing. Canada's economy has apparently slipped back into recession, while Britain's is still mired in a downturn, and Germany has just announced its third consecutive quarterly decline in GNP. Even Japan has posted less than 2% growth over the past half year.

The slowdown is being exacerbated by a hard-nosed attitude by central banks overseas. Nakagama points out that recent high wage settlements in Germany's steel industry seem to have strengthened the Bundesbank's resolve to short-circuit a wage-price spiral. Similarly, monetary restraint by Japanese authorities seeking to quell excessive inflation in land and property values has already pushed housing starts, industrial production, and corporate capital spending plans into steep declines, making it "extremely likely" that Japan will undergo at least one quarter of shrinkage, says Nakagama.

Because of Germany's critical role in Europe, and Japan's in the Pacific Rim, Nakagama thinks their economic woes will inevitably affect their neighbors, undercutting America's export performance even more. And economist Richard F. Hokenson of Donaldson, Lufkin & Jenrette Securities Corp. notes that the 1991 surge in exports reflected orders placed in the last half of 1990, when the dollar was weak and overseas economies were still relatively strong. By contrast, the current strength of the dollar, he says, "will reinforce the inhibiting effect of growing economic sluggishness overseas on export demand."

"Exports," warns PaineWebber's Harris, "are the wild card in the economic outlook. If they actually decline, the recovery could run out of steam again."