An Import Hungry America Took A Bite Out Of First Half Growthby
There is no question that the U.S. economy's performance in the first half of 1993 was disappointing. However, the reason for that lackluster showing is now clear--and it's not because of weak domestic demand. The major source of the first-half slowdown was a sudden and huge widening of the nation's trade deficit.
The shocking revelation that the U.S. merchandise trade gap soared to $12.1 billion in June had economists scratching their heads. That deficit was the widest in more than five years, and it was more than $3 billion above the forecasters' general expectations.
Moreover, the June surprise extends the pattern of bigger gaps that began in March. In both March and April, the trade deficit jumped to more than $10 billion, up from less than $8 billion in both January and February. Most economists believed the spring numbers to be anomalies that were not indicative of the true trend. Wrong.
To be sure, recession in most of the industrialized world--and its harmful impact on U.S. exports--is one factor in the trade balance's deterioration. Export growth slowed to a standstill in the first half, but weak foreign demand is far from the main culprit. Since the fourth quarter of 1992, a surge of imported goods has accounted for all of the widening in the trade gap.
The resulting drag on economic growth was enormous. The Commerce Dept. will issue its annual revisions to gross domestic product on Aug. 31, so many numbers will change. But as of now, it looks as though a worsening trade deficit, by itself, robbed the economy of about 1.5 percentage points of growth during the first half. A rush of imports hardly reflects weak domestic demand.
On the contrary. In the first half, domestic spending for goods other than petroleum products rose at an annual rate of about 4%, based on the unrevised data. The problem: Imports of goods, excluding oil, skyrocketed at an annual rate of about 14%. As a result, the imports' share of domestic demand for goods reached a record 24.6% in the second quarter (chart).
In a recovery, the pace of imports normally outstrips that for domestic demand, but the four-percentage-point increase in import share since early 1991 is startling. That's not only because of the huge rise, but because it has occurred without any deterioration in the competitive position of U.S. companies via currency movements.
Coming out of the 1981-82 recession, the import share jumped five percentage points, but that could be explained by the supercharged foreign-exchange value of the dollar. This time, the U.S. appears to have nothing to blame but its ravenous appetite for foreign-made goods.
The surge in imports means that U.S. manufacturers are missing out on much of the pickup in domestic demand. Combine that with the slower pace of export growth, and it's easy to see why the yawning trade gap is a big part of the factory sector's current problems.
New orders for durable goods fell 3.8% in July, to $127.5 billion, the largest decline in 11 2 years (chart). In addition, factory shipments slumped by 4.2% in the month, and unfilled orders shrank 0.4%, to $434.7 billion, the lowest level in almost five years.
The July drop probably overstates the weakness, though. Orders had jumped 4.5% in June, reflecting a 14.3% surge in transportation equipment. But the transportation sector posted an 18.1% plunge in July, as orders for aircraft and autos reversed course. Excluding transportation, orders rose 1.4% in June and 1.3% in July.
Even so, the split between domestic spending and factory orders shows how demand is bypassing U.S. manufacturers. June imports jumped 5.1% from May's level, to a record $49.7 billion. The increases were broad, led by rising demand for industrial materials and capital goods, excluding autos. Year-to-date, price-adjusted imports are up 12.5% from the same period last year, and industrial materials and nonauto capital goods account for nearly three-fourths of that increase.
In particular, imported high-tech capital equipment is grabbing an increasing share of U.S. demand during the current boom in business spending for such goods. As a result, the U.S. trade surplus in capital equipment has dwindled to only one-third of what it was two years ago. This trend is also a byproduct of the rapid growth in foreign investment in the U.S. in recent years.
Four countries account for two-thirds of the year-to-date increase in imports, compared with the same period a year ago. Listed in order of the size of their contribution, they are Canada, Japan, China, and Mexico. Not surprisingly, those four nations also account for nearly 60% of the widening in the U.S. trade deficit.
On the other side of the trade ledger, exports are clearly slowing down--but not nearly as fast as the June data suggest. Exports plunged 3.3% in the month, to $37.6 billion. However, the drop wasn't really that bad. About 40% of the decline came from a one-time falloff in nonmonetary gold shipments.
Still, export growth has slowed from the glory days of the late 1980s. After adjusting for price changes, real exports in the second quarter grew by 5.4% compared with a year ago. Not bad, but in 1988, exports were soaring at four times that pace.
The slowdown in exports is the result of slow growth in the U.S.'s major trading partners. Recessions in Europe have curtailed demand for American goods. In the second quarter, U.S. shipments across the Atlantic were off 3.6% from a year ago. Exports to the rest of the world have actually held up, rising by 7% last quarter (chart).
A turnaround in Europe is crucial to U.S. exports because Europeans buy about one-quarter of American exports. However, the failure of the central banks, led by the Bundesbank, to cut interest rates faster has delayed recoveries in most of Europe. Although Britain is growing, its upturn is still shallow.
Meanwhile, across the Pacific, import restrictions and an economic slump will continue to hold back U.S. export growth to Japan. Shipments to Japan doubled from 1987 to 1990, but since then, they have gone nowhere.
Moreover, the foreign-exchange value of the dollar isn't likely to help much, either. Although great attention has been paid to the dollar's record lows against the Japanese yen, the American currency is strengthening vis- -vis the major European currencies. That's the result of our faster growth and low inflation, as well as the meltdown of Europe's exchange-rate mechanism.
Since the first ERM crisis in September, 1992, the dollar has risen 20.8% against the currencies of Britain, France, and Germany, on a trade-weighted basis. At the same time, it has fallen 15.5% against the yen (chart).
The rising dollar means that U.S. goods sold in Europe will be at a price disadvantage when those countries start to recover next year. However, efforts by U.S. manufacturers to boost productivity and cut unit labor costs have placed U.S. factories in a highly competitive position.
The problems in Europe and Japan mean the hope for exporters in the second half lies with the rest of the world. And the news from developing countries, at least, is good. Shipments to them are on a solid uptrend, in part because many of these countries are growing faster than the industrialized economies. Shipments to the Pacific Rim have increased by 8% so far this year compared with the first half of 1992, and exports to Latin America are up 4.7%.
The demand from developing nations means that exports will likely rise by an additional 5% in the second half. But growth will not pick up sharply until 1994--when Europe and Japan get back on their feet. That means that hopes for correcting the trade deficit--and helping to lift U.S. factory output--for the rest of 1993 may well be at the mercy of America's ever-growing appetite for imports.