A weakening economy is getting some relief from abroad as American companies step up their sales to foreigners, the latest data, released yesterday, suggests.
The government reported both the trade deficit for February, which shrank slightly, and the Producer Price Index for March, measuring the prices of merchandise sold to wholesalers and retailers. The prices were flat across an array of products, except for food and energy.
The latest numbers were meaningful, economists said, not on their own, but in the context of the last year. The United States appears to be gradually transferring to Europe and Japan its role as the locomotive for global growth.
“Europe and Japan, and also most of the developing world, are growing more quickly than we are, and now we are finding ways to get a lift from their growth,” said James Paulsen, chief investment strategist for Wells Capital Management in Minneapolis. “It’s the opposite of what happened for a decade.”
The Producer Price Index fit this pattern. The overall increase was 1 percent, down from 1.3 percent in February, but well above the average monthly increase of 0.4 percent over the last six months, the Bureau of Labor Statistics reported.
Imports, which totaled $182.43 billion in February, continued to swamp exports at $124.99 billion that month. But over the most recent year, the dollar value of exports has risen nearly twice as much as the dollar value of imports.
“That is the key,” Mr. Bethune said, citing in particular rising exports of aircraft and other capital goods at a moment when capital investment is shrinking in this country.
Given the recent easing of the trade deficit, Mr. Bethune and other economists argue that trade is less likely to pull down the nation’s economic growth rate, as it occasionally did last year. That is an important contribution, given that growth appears to be declining from a 2.5 percent annual rate in the fourth quarter of last year to less than 2 percent in the just-completed first quarter, according to many estimates.
PGL at Angry Bear, as is often the case, beat me to the punch. I’m willing to believe that the trade balance is going to improve, but like PGL — and Brad Setser –, I’m not so sure it will be by way of surging exports that will thereby maintain aggregate demand. Indeed, I much prefer Brusca’s analysis at Haver, which stresses the recent downturn in capital goods exports and imports, even as y/y flows have been growing strongly.
Let’s step back for a minute to assess how much of the increase in flows we should have expected. One aspect of the answer is the extent of change in relative prices. While import goods ex.-oil prices have risen substantially — almost half of the dollar depreciation against a broad basket of currencies, even more substantial has been the export price increase. It’s almost been proportional to the dollar’s decline against a trade-weighted broad basket of currencies.
Figure 1: Log nominal dollar exchange rate against a broad basket of currencies (blue), price of goods imports (red) and price of goods imports ex.-oil (green) rescaled to 0 in 2002m02. Source: Federal Reserve Board via FRED II, BLS April 12th import/export price release and author’s calculations.
Figure 2: Log nominal dollar exchange rate against a broad basket of currencies (blue), price of goods exports (red), price of capital goods (green), price of agricultural commodities (black), rescaled to 0 in 2002m02. Source: Federal Reserve Board via FRED II, BLS April 12th import/export price release and author’s calculations.
But a closer inspection of Figure 2 indicates that much of the price increase is due to an exogenous increase in agricultural commodity prices. Capital goods prices, remarked upon in the article, actually are close to where they were in 2002. So while there is a surge in prices of certain commodities the United States exports, capital goods prices — an indicator of demand for goods sensitive to cyclical fluctuation — have barely budged. Admittedly, capital goods prices might be depressed by technical progress, driving down prices of computers, peripherals and semiconductors. The price index for exports of capital goods ex. computers (BLS code 2EXCOMM) has risen by 9.2% since 2002m02, but has been essentially flat for the last three months. So, the take-away is that exchange rate pass-through this time around has — finally — been fairly high (at least relative to recent experience ,). Hence, strong export growth is unsurprising; but indications of future goods export growth are not strong.
What about export quantities? We have NIPA data up to 2006q4. The latest trade release for February is on a different basis than the NIPA data, but they are similar enough that one can extrapolate to 2007q1 on the basis of the trade data. This is depicted in Figure 3, where the 07q1 figures are based on an average of the first two month’s data.
Figure 3: Log exports of goods on a NIPA basis (blue) and exports of goods on balance of payments/Census basis (red), SAAR Ch.00$. Source: BEA NIPA release of March 29th, BEA/Census April 13th trade release and author’s calculations.
Exports of goods in real terms appears to be stabilizing. But, as mentioned before, a better indicator of future demands is capital goods, since purchases of such goods are sensitive to expectations regarding future economic activity (here I’m assuming that export supply is perfectly elastic for simplicity). Inspection of the capital goods exports and imports data in Figure 4 also suggests stagnation of demand for exports. Imports appear to be bouncing back slightly (once again, recalling that the 07q1 figure is the average of only January and February data).
Figure 4: Log exports of capital goods on a NIPA basis (blue) and on a balance of payments/Census basis, (red); and log imports of capital goods on a NIPA basis (green) and on a balance of payments/Census basis (black), SAAR. 07q1 data are based on only two months data. Source: BEA NIPA release of March 29th, BEA/Census April 13th trade release and author’s calculations.
Closer examination of the higher frequency monthly data yields one interesting insight. As shown in Figure 5, capital goods exports declined by 6% (in log terms, non-annualized) in February (the standard deviation of monthly changes over the last year is 2.7%). If this decline is sustained in March, then real capital goods exports in 07q1 will actually decline.
Figure 5: Log of monthly capital goods exports on balance of payments/Census basis, seasonally adjusted (blue) and log of capital goods imports (red). 07q1 data are based on only two months data. Source: BEA/Census April 13th trade release and author’s calculations.
Don’t get me wrong. I still think that overseas demand may save the US from a pronounced slowdown, and help shrink the trade deficit. But I don’t think we’ve yet seen evidence that the bulk of the work is going to be done by US goods exports (services exports have been steadily rising, but the last 3 month change in the nominal services export category has been negative 1.9 percent on an annualized basis).