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MAY 29, 2006
U.S.: A Ray Of Hope For The Trade Gap Exports are surging, powered by overseas demand and a weaker dollar In recent years the U.S. trade deficit has been the No. 1 blight on an otherwise robust economy. Its persistent widening has fueled trade tensions around the world, outsourcing worries among workers, and protectionist sentiment in Washington. Is there a chance for improvement in the trade gap anytime soon? Well, don't look for outright shrinkage, but the emerging strength in exports is the best sign yet that the rate of deterioration is slowing and that the deficit may even level off later this year. 
The March report on international trade was an eye-opener. The deficit for goods and services posted an unexpected narrowing to $62 billion, from $65.6 billion in February, reflecting a big 1.9% gain in exports, while imports fell by 0.8%. The immediate implication of the March trade surprise will show up in the government's update of first-quarter economic growth on May 25. The March gap was much less than that assumed by Washington's number crunchers when they first reported growth at a 4.8% annual rate. Now economists believe the first-quarter pace will be revised to close to 6%. Trade may continue to be less of a drag on the economy this year. The goods sector best tells the story. For the first quarter, real exports of goods (which are adjusted for changes in export prices) increased at a 19.6% annual rate from the fourth quarter -- the largest quarterly advance in nearly nine years. Some of that surge reflected a post-hurricane rebound, but it's not just a one-quarter blip. The growth rate from the previous year is now up to 12.4%, a pace not seen since 2000, while real imports are up only 7%. The export gains have been in all major product groups and geographic regions, led by strength in capital goods and overall shipments to Asia. Strong export demand has been a key reason for the recent vitality in U.S. manufacturing output and employment. In April factories were using their production capacity at the highest rate since the late 1990s. THE REASONS FOR THE EXPORT BOOM are fairly straightforward, and they explain why the outlook for continued robust growth is bright. Overseas demand is picking up as economies from Japan to Europe shake off the blahs of recent years. Plus, the dollar is falling again, and this latest leg of the decline that began in early 2002 appears to have further to go. Of course, the sticking point for the trade gap remains imports. Because the volume of imports is 50% greater than exports, the latter must grow at a rate that's 50% faster than imports just to keep the deficit from widening. That means if real exports of goods continue to grow at about 12% this year, real imports cannot increase more than 8%. And there's the rub. Some of the import slowdown has been temporary, reflecting the volatility over the past year in imports of petroleum products, but the pace will most likely pick up.  Still, exports seem ready for the challenge, especially amid solid prospects for global growth. The latest forecast from the International Monetary Fund pegs world economic growth at 4.9% this year, a smidgen higher than last year's 4.8% clip. With U.S. growth expected to cool off a notch, more of that pace will reflect faster growth outside the U.S.The two regions where growth has picked up notably, Europe and the Pacific Rim, have accounted for nearly half of the growth in the value of U.S. goods exports during the past year. Pacific Rim countries alone, fueled by booming growth in China and the turnaround in Japan, have absorbed 28% of the increase in shipments. China, in particular, is becoming an increasingly important export destination for U.S. goods. It accounted for a bit less than half of the increase in shipments to the Pacific Rim. Although exports to China are only about 5% of all U.S. shipments, they have been responsible for about 12% of the rise in U.S. exports during the past year. AS BUSINESSES OVERSEAS gain confidence in their domestic economies, they are boosting their capital spending. While exports of a wide range of products, including industrial materials, consumer goods, and even autos, are rising, it is capital goods that are leading the boom. Overseas demand for aircraft, high-tech gear, and other capital equipment has accounted for 60% of the growth in real exports over the past year. U.S. manufacturers are feeling the updraft. April factory output increased a solid 0.7% from March, and the gain would have been even greater but for a drop in auto production. The real power in April output was in business equipment, which jumped 1.8% from March. Over the past year, equipment production is up 12.5%, the best yearly growth rate since 1998, with output of high-tech items, such as computers, communications equipment, and semiconductors, up more than 22%. Clearly, manufacturers are benefiting from upturns in capital spending both abroad and here at home, but the impetus that export demand is supplying to U.S. equipment producers is unmistakable. In particular, exports of advanced technology goods, including everything from aerospace to electronics to information technology, have accounted for a third of the overall increase in goods exports over the past year. THE OTHER BIG PLUS in the export outlook is the dollar's renewed decline, which will give U.S. goods an extra bit of competitiveness in many global markets. The trade-weighted dollar, after declining some 28% from its peak in early 2002, regained some ground during the past year. However, it has dropped nearly 6% just in the past month, hitting an eight-month low against the yen, a 12-month low vs. the euro, and dropping to levels against the Canadian dollar not seen since the early 1990s.  The greenback's decline appears to have further to go. Sentiment in the currency markets is running strongly negative against the dollar right now, partly because of last month's communiqué from the Group of Seven industrialized countries calling on Asian nations to allow greater currency appreciation, and partly because of speculation that the Federal Reserve is about to end its rate-hiking. As the interest rate spreads narrrow between rates in the U.S. and those abroad, dollar-based assets become relatively less attractive to investors.Because changes in the dollar's value affect export and import prices with a lag, improvement in U.S. price competition will show up in the second half of the year, as import prices rise faster and as export prices slow. Many businesses will also see a boost to their bottom lines as global growth and a falling dollar lift profits of U.S. exporters and multinationals. Perhaps the biggest benefit for the economy from the new strength in exports is the additional support it will give overall growth at a time when the drag from housing is increasing. The combined thrust from U.S. exports, capital spending by business, and moderate growth in consumer spending should be sufficient to keep the economy chugging along at a healthy clip for the rest of the year.  By James C. Cooper
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