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Foreigners Are Failing to Buy Enough Stuff

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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The theme of the week so far in U.S. corporate earnings announcements has been that the rest of the world is dragging us down. The strong dollar and the related phenomena of no growth in Europe and slowing growth in Asia have been blamed for earnings disappointments at Caterpillar, Pfizer, Procter & Gamble, DuPont and several other big companies.

This is less of a problem at smaller enterprises -- the Russell 2000 is having a better week than the Standard & Poor's 500. Yet at a time when the U.S. is the bright spot in the global economy, the big-company stumbles raise the worry that trouble overseas is going to drag down the economy here.

I can remember the 1990s, when economic troubles beyond U.S. borders (the Mexican peso crisis of 1994, the Asian financial crisis of 1997, the Russian debt calamity of 1998) kept threatening to poleaxe the U.S. economy -- but never did. A slump finally came in 2001, but that one was made in the USA. Since then, developing nations, China in particular, have been growing faster than the U.S. Even Europe was doing better before things started unraveling there in 2009. So you’d think the U.S. economy would be more vulnerable to overseas weakness than it was the last time around. How vulnerable, though?

By the most straightforward measure, exports and imports, the U.S. economy remains pretty self-contained. Exports of goods and services accounted for 13.5 percent of gross domestic product in 2013, according to the Bureau of Economic Analysis, up from 10.5 percent in 1998. Imports added up to 16.5 percent of GDP in 2013, up from 12.3 percent in 1998.

To find really big overseas effects, you need to look at corporations. Since they kicked foreign companies out of the S&P 500 Index in 2002, the people at what is now called S&P Dow Jones Global Indices have been tracking the percentage of sales of companies on the S&P 500 that come from outside the U.S. This is harder than it sounds, because companies are under no obligation to report how much of their sales come from outside the U.S., but here is the best estimate from S&P Dow Jones's Howard Silverblatt:

So, the foreign share has been flat lately, but it looks like it’s probably markedly higher than it was in the late 1990s. The Bureau of Economic Analysis allows us to go back a lot farther in measuring the foreign share of corporate profits, and while this data covers a broader range of companies, it seems to follow a similar trajectory (following the example of this 2011 BEA briefing, I have divided “receipts from overseas” by total corporate profits; the numbers can be found in Table 6.16 of the National Income and Product Accounts):

This chart shows a huge spike in the foreign share of profits in 2008, when the U.S. economy turned down well before the world’s did, a long upward trend before then, and a flat stretch after. The long upward trend helps explain why corporate profits have risen so much as a share of the economy -- overseas earnings have been boosting bottom lines. Now that upward trend in foreign profits appears to have stalled.

Yesterday's Commerce Department report on declining durable goods orders led some to wonder whether slow overseas growth was already crimping business spending here. I'd hold off on coming to any strong conclusions about that just yet. The foreign profits boom of the 2000s didn't exactly bring a rush of business investment or hiring in the U.S., so why would the current slowdown bring a bust?

The U.S. economy may still be enough of an island that what happens elsewhere matters less than everybody seems to think it does.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

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Justin Fox at

To contact the editor on this story:
Paula Dwyer at