America's LifelineExportsIs Fraying Fast
The export boom was great while it lasted. In fact, foreign trade has been the U.S. economy's lifeline over the past year. Through the third quarter, the U.S. managed to grow 0.8%, but excluding the net effect of exports and imports, the economy would have contracted 0.6%. Now, just when a steep drop-off in domestic spending by consumers and businesses is pushing the U.S. into the most severe phase of its recession so far, trade will not be around to soften the blow. Overseas demand is collapsing as the global economy slides into its worst downturn since the early 1980s. Making matters worse, the dollar's trade-weighted 16% rise since July is cutting into U.S. competitiveness.
The first hint of trade's fading support came with the September report on exports and imports, both of which fell sharply, partly reflecting distortions caused by hurricanes and the Boeing (BA) strike. Exports plunged 6%. Storms in the Gulf of Mexico mostly depressed shipments of oil and other commodities, but even excluding agricultural goods, industrial materials, and aircraft, exports still dropped 1.2% after an even larger decline in August.
More telling, exports of capital goods, excluding aircraft, posted the largest two-month slide since early 2003. Overseas shipments of high-tech equipment have fallen off, in line with recent reports of weakening sales by many U.S. technology giants. September exports of autos also fell, and shipments of noncar consumer goods, which were not greatly affected by the storms, registered the largest two-month drop since the early 1980s.
The export slowdown is widespread. Yearly growth in shipments to Europe tumbled in September as exports to the 12-nation euro zone fell below their previous-year level and demand from Pacific Rim nations slowed abruptly. These regions buy up about half of all U.S. exports. The markets that account for the other half—developing economies in Asia, Latin America, and Eastern Europe—still showed solid growth, but even there the pace was cooler.
Export weakness will become much more pronounced in coming months. The October plunge in the Institute for Supply Management's index of export orders points to a steep falloff in shipments. Economists expect the third-quarter contraction in the euro zone economy to deepen. Japan has shrunk for two quarters in a row with another drop expected this quarter. And growth in emerging-market economies has hit a wall. Economists at JPMorgan Chase (JPM) estimate that growth among U.S. trading partners, which averaged 2.4% annually in the first half, will drop to -0.6% in the current quarter.
U.S. exports could be hit hard by the pullback in emerging markets, where American producers have found ready buyers. Their big spending on business equipment and infrastructure has played to a U.S. strength: Half its exports are capital goods and industrial materials. Now, after these countries have invested heavily in new production capacity to meet global demand, a lot of that capacity will start to sit idle. In addition, foreign capital is starting to flow out of many emerging markets as a result of the global financial upheaval, and tighter financial conditions will further restrict their spending.
Shrinking demand both overseas and in the U.S. is proving to be a devastating one-two punch for American manufacturers. U.S. goods producers now export a record 19% of their output. Plus, October data show spending by U.S. consumers and businesses is contracting even faster this quarter than it did last quarter. That will also cut deeper into overseas activity and demand in coming months. Over the three months through October, factory output fell at a 15.7% annual rate, a shrinkage not seen since the severe 1981-82 recession.
Since early 2007 the inflation-adjusted trade deficit has narrowed by 43%, adding handsomely to overall growth even as domestic demand weakened. But the trade gap is now set to level off for a while. That swing will rob the economy of a major plus for growth, allowing the full weakness in the domestic economy to be felt.