The U.S. Will Have to Recover on its Own
Washington's massive $787 billion stimulus package, signed by President Barack Obama on Feb. 17, is the first major step toward a U.S. recovery. The next steps—help for housing and a lasting fix for sick banks and dysfunctional credit markets—are following close behind. But these policy efforts lie in stark contrast to actions taken around the rest of the globe. Nearly all overseas governments and central banks are far behind the U.S. in their efforts to ease financial conditions and support growth, even though many economies are more deeply mired in recession than the U.S.
That means the U.S. will likely be the first economy to pull out of its tailspin, acting once again as the locomotive for world growth. But even as U.S. demand begins to stir, one hopes by the second half, it's going to be a long time before U.S. growth can count on a lift from trade with the rest of the world.
The recent series of sobering reports from overseas shows the depth and breadth of the problems abroad. Real gross domestic product in the fourth quarter contracted at annual rates of 5.9% in both Britain and the 15- nation euro zone—including 8.2% in Germany—and a dramatic 12.7% in Japan. These numbers suggest the International Monetary Fund's January forecast of a 2.8% shrinkage in world trade, the first in 25 years, may be too optimistic.
Of course, the U.S. economy turns on domestic demand, but the worst global recession since the 1930s has kicked away an increasingly important prop for U.S. growth. Heading into the recession, the U.S. exported a record 24% of the goods it produced. Even during the first nine months of the downturn, net foreign trade added 1.5 percentage points to growth. In the past two years the share of profits generated by overseas business has jumped to 37%, from 26%.
Given the growing importance of exports, the December trade report was especially bad news. Foreign demand for U.S. goods and services dropped 6% in December, despite a one-off rebound in aircraft exports after the end of the strike at Boeing (BA). For the quarter, exports fell at a 41% annual rate. At the same time, imports plunged at a 48% rate, illustrating the steepness of the falloff in U.S. demand.
Manufacturing is the global economic sector hit hardest by shrinking trade volumes. Economists at JPMorgan Chase (JPM) estimate that world manufacturing production dropped at about a 21% annual rate last quarter, with broad declines that ranged from 16% in the U.S. and 20% in the euro zone to 22% in emerging-market economies and a staggering 40% in Japan.
The drop-off in emerging markets, led by high-tech manufacturing, has been sudden. These economies previously had been holding up better than their developed-country trading partners. In China, both exports and imports fell sharply in January, indicating no sign of a turnaround— although China's recent fiscal stimulus and monetary easing should eventually offer some stability.
In the U.S., plunging foreign demand has compounded the factory sector's weakness. Manufacturing output dropped sharply in January, falling 2.5% as factories used only 68% of their production capacity, a post-World War II low. Cutbacks in auto output are a big reason, and not merely because of weak U.S. demand. Inflation-adjusted exports of autos fell at a 67% annual rate from July through December, accounting for 25% of the overall drop in U.S. shipments.
The export nosedive shows no sign of abating. In December inflation- adjusted exports of goods were down 8.5% from a year ago, but the historically low level of the January index of export orders, compiled by the Institute for Supply Management, implies much more weakness to come. The index foreshadows exports a few months ahead, and it portends a yearly decline at two or three times the December rate.
Last quarter was the first in nearly two years that trade was a net drag on U.S. growth. That pattern will continue until the rest of the world can shift its growth out of reverse.