Strong Exports Could Mean a Weak Recession
Through the first quarter, at least, the economy has fought the good fight against the forces of recession. It eked out 0.6% growth in the fourth quarter, and with much of the key monthly data now in hand, most economists expect the first-quarter number, due on Apr. 30, to be within a few tenths of zero, on one side or the other. Strong exports are a big reason why growth has held up as well as it has so far, but the second quarter is looming as the economy's weakest yet. Continued strength in foreign trade will be needed to ensure a mild recession. Are exports up to the task?
It appears they are—at least to a point. Growth overseas is showing signs of cooling and is certain to slow further by yearend, while costlier imported oil is siphoning off some of the income generated domestically. However, high-octane stimulus from the Federal Reserve, Congress, and government agencies is on the way in the second half. That means the economy's period of greatest vulnerability is right now. And trade is set to continue providing substantial support into the summer when the reinforcements arrive.
The latest trade data through February show inflation-adjusted exports of goods are accelerating, not slowing. They jumped 1.7% in February, the biggest gain in seven months, and grew at a 15.4% annual rate over the past three months, a sharp improvement from the prior three months.
That demand will remain strong. The Institute for Supply Management's index of export orders in the first quarter stood slightly above its level in the second half of 2007. In the coming months the recent acceleration in the dollar's decline will further enhance U.S. companies' competitiveness. Over the past year the trade-weighted greenback, adjusted for inflation, has dropped 9.5%, compared to its 3.8% fall in the year before.
Powered by exports, the trade deficit continued to narrow last quarter, making another positive contribution to economic growth. Trade will most likely provide an even greater boost in the second quarter. Last quarter's lift was much smaller than in recent quarters because of February's surprisingly large gain in inflation-adjusted imports, which soared 2.4%.
Coming as the U.S. slides toward recession, that import surge is not sustainable. Imports of consumer goods and autos rose strongly, even as retail sales in the first quarter posted no growth from the fourth, the weakest showing in six years. Imports are set to slow in the second quarter, perhaps sharply, as consumer and business spending weaken further.
Imported oil is also taking a bite out of the boost exports are giving to growth, but not via a wider trade gap. It's the inflation-adjusted deficit that affects economic growth, and over the past year the volume of imported oil has not risen much. However, the 70% rise in crude prices over the past year has acted like a $200 billion tax, robbing 1.4 percentage points of U.S. gross domestic product. If prices retreat, every $10-per-barrel drop will act like a tax rebate of 0.3 percentage points.
Costly oil, weaker U.S. growth, and stronger overseas currencies, the other side of the weaker dollar, are already nibbling at growth abroad, but the prognosis is not all bad. Both Japanese and European shipments to the U.S. are down from a year ago, but their exports to non-U.S. destinations remain strong, and their economies, while slowing, are weathering the storm. China's growth is also slowing, but its booming internal demand continues to power other Asian economies. Emerging markets in Asia, Latin America, and Eastern Europe, destinations for about half of U.S. exports, continue to grow strongly.
The export outlook depends largely on how much the cheaper dollar can offset the coming slowdown overseas. Given the greenback's 24% drop since its peak six years ago, it's a good bet U.S. companies already have made significant inroads into foreign markets, and the dollar's sharp decline over the past year will offer more opportunities to build market share.