Don't Expect This Recovery To Get Much Foreign Aidby
In recent years, foreign trade has been kind to the U.S. economy. From 1986 to 1991, a steady narrowing of the trade deficit generously contributed 30% of the growth in real gross domestic product. And in late 1990 and early 1991, when the economy was tumbling, an improving trade balance broke the fall.
Well, no more Mr. Nice Guy. In 1992, slower export growth and an acceleration in the pace of imports will reverse some of the trade deficit's improvement and generally make life tougher for an economy that is struggling to recover.
Such contrary behavior is already becoming evident. The gap between imports and exports widened to $7 billion in April, after averaging $4.9 billion a month during the first quarter. The April deficit was the largest in 1 1/2 years. It suggests that deterioration in net exports during the second quarter will result in yet another subpar performance for real GDP, perhaps no better than the first quarter's growth of 2.4%.
THE SECOND QUARTER LACKS VIGOR
The drag from foreign trade hits the economy at a bad time. Consumers paused to catch their breath in the second quarter after their spending spree in the first, when outlays surged at an unsustainably fast 5.4% annual rate. Employment growth has not picked up enough to generate anywhere near the income growth necessary to maintain that sizzling pace.
In fact, job-market improvement also appears to be taking a break. After weeks of steady declines, the four-week average of initial unemployment claims has been hovering just above the 400,000-per-week annual rate since late April. Claims will have to pierce that barrier before solid and sustainable job growth is assured. The numbers say that layoffs have stopped but that new jobs are opening up at a snail's pace.
Also, the big swing in inventory growth, which was expected to give second-quarter GDP a boost, may not be as large as first anticipated. It's becoming apparent that a lot of that first-quarter rush in consumer demand bypassed U.S. manufacturers and instead went to imports (chart). As a result, the need for factories to rebuild inventories will be diminished.
The import surge, along with slower growth in both consumer spending and exports in the second quarter, explains the weak performance of factory orders in May. Makers of durable goods saw their new bookings drop 2.4% in May. The weakness was broad, although a sharp 27.7% plunge in orders from the military accounted for nearly all of the overall decline.
It's important to remember, though, that durable-goods orders are extremely volatile. The May dip followed gains of close to 2% in both March and April. The three-month average of bookings, a better indication of the trend, continued to rise in May.
The problem for manufacturers is that new orders aren't rising fast enough to stop the slide in the backlog of unfilled orders. It fell 0.6% in May, the ninth decline in a row (chart), to the lowest level in three years. Right now, factories are meeting new demand by working longer hours. Manufacturers won't commit themselves to the extra cost of beefing up payrolls until they see their order backlog growing.
All this doesn't mean the recovery is petering out again, as it did last year. Upturns in autos and housing, accompanied by their broad impacts on related industries, are still leading the way. Demand for U.S.-made cars, for example, continued to look firmer in mid-June, when sales stood at an annual rate of 6.4 million. The sluggishness in new orders, however--and demand generally--does drive home the point that the upturn will undoubtedly be the most lethargic in the postwar era.
MEXICO IS SPICING UP EXPORTS
The prospect of a widening trade deficit only makes matters worse. To be sure, exports are still a key source of strength for U.S. manufacturers. In the first quarter, foreign demand accounted for a record 21.6% of industrial output, up from less than 14% in early 1987.
The pace of exports, however, is much more subdued than it was in the late 1980s, and it's currently too slow to offset manufacturers' losses to imports.
In April, exports slipped for the fourth time in five months, dropping by 1.9%, to $36.4 billion. U.S. producers posted big declines in aircraft, telecommunications equipment, and tobacco products. For the first four months of 1992, exports are up just 6.6% from a year ago. That's slower than the 7.1% pace of early 1991.
Slowdowns in many industrialized economies have hurt demand for U.S. goods in Japan and Europe. Indeed, growth in exports has come solely from countries outside the Group of Seven industrialized nations. Total U.S. shipments to the other G-7 nations--Britain, Canada, France, Germany, Italy, and Japan--have hardly budged over the past two years. But excluding these developed countries, demand for U.S. goods has been increasing at a steady pace (chart).
Most notably, trade with Latin America continues to strengthen. Exports to Brazil have risen by 7.5% so far this year, while shipments to Venezuela are up 26.1%. And in Mexico, where economic growth is healthy, demand for U.S. goods has jumped by 34.9%. Indeed, sometime this year Mexico could well pass slumping Japan as our No.2 export buyer, after Canada.
IMPORTS ARE ON THE REBOUND
The increase in demand from developing countries will continue to lift output of U.S. manufacturers who export. The problem, however, is that as the economy recovers, America's appetite for foreign goods is also rebounding. And that cuts into production of U.S. goods that compete head-to-head with imports.
That was evident in April, as imports rose for the second consecutive month. They advanced by 1.6%, to $43.4 billion, and now stand 9.1% above their level of a year ago. Increased imports of petroleum accounted for about half of the April gain, but there was also an influx of manufactured goods such as cars and apparel. The inroads made by foreign producers into U.S. markets are one reason why the current rebound in the factory sector remains lackluster.
Consumers have once again become large buyers of foreign goods. In the year ended in April, imports of consumer goods, excluding cars and food, soared by 16%. At the same time, retail activity--the sum of store sales and inventory growth--was up only 4.1%. These divergent trends indicate that consumers have accelerated their spending on imports much faster than they have increased their buying of goods overall.
But it isn't just consumers. U.S. purchases of foreign-made capital goods are also picking up, even as American exports of similar goods are hurting. Such imports rose by 6.9% over the past year, while capital-goods exports--once a powerhouse in the trade sector--are flat. Some of the increase in imports reflects the growing presence of foreign-owned transplant factories, but the rest reflects the penetration of imports.
The recent slippage in the U.S. dollar on foreign exchange markets could help to reverse both the slowdown in exports and the pickup in imports. The dollar's exchange rate, as measured against the currencies of our 15 major industrialized trading partners, has fallen about 4% from its recent peak in mid-March (chart). The slow recovery of the American economy, plus our lower short-term interest rates relative to foreign rates, will keep downward pressure on the dollar.
The dollar's slide, though, hasn't been steep or long enough to provide any great lift for exports. In order for foreign sales to show more pep, other economies will have to strengthen by a lot more.
That's not likely to happen anytime soon. For now, rapid growth in the newly industrializing countries is helping. But until Japan and Europe can shore up their economies and generate faster growth for U.S. exports, foreign trade will continue to be yet another thorn in the economy's side during 1992.