Photographer: Karel Prinsloo/Bloomberg

Despite the Dollar's Surge, Americans Aren't Buying More Stuff from the Rest of the World

The Fed's nightmare hasn't started yet.

U.S. consumers were supposed to be the world's economic engine, but haven't been straying from domestic shores.

Despite the double-digit advance in the U.S. trade-weighted broad dollar index in 2015 on the heels of the rally in the second half of 2014, real goods imports (excluding petroleum) have gone nowhere for over a year:

REAL IMP
Source: Bloomberg

That is, although it got a lot cheaper for the U.S. to buy stuff from the rest of the world, Americans haven't been doing so.

This surprising finding comes to us from Brad Setser, senior fellow at the Council on Foreign Relations, who observed that this metric is down on an annual basis, and that imports have actually added to growth over the past three quarters.

"Real goods imports haven’t really changed at all for say the last 15 or so months," he writes.

While GDP growth has been far from blockbuster over this span, it's certainly been positive.

Imports typically serve as a drag on growth when final domestic demand in the U.S. is expanding. As such, Setser estimates that imports should have shaved half a percentage point off growth over the past four quarters — far more then has been the case.

"Most careful analysis also has shown there is some impact of the dollar on imports, even if the impact on exports is greater," he writes. "And, as a result of more or less flat imports, net exports haven’t subtracted significantly from U.S. growth over the last four quarters."

Trade Drag
Source: Bloomberg

Emerging market economies have held up better than anticipated this year despite a relative dearth of U.S. demand, a testament to firming domestic demand in those countries and surprisingly resilient shipments to Europe.

And for a Federal Reserve that's long been worried about the effect of tighter financial conditions — which include a loftier greenback — on the growth outlook, Setser's analysis suggests that the worst is yet to come.

"It wouldn’t surprise me if net exports emerge as a stronger headwind over the next couple of quarters," he concludes. "All it would take is for imports to start to respond a bit more normally to U.S. demand growth."

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