Exports and the economy

A few good machines

Exports are cushioning America's downturn. But for how long?

AMID the ageing brick warehouses of South Boston, an assembler at the Cole Hersee switch plant inserts the pin into a roller connecter, flattening each end with a metal press to keep it secure. With the economy in a funk, you might expect such an old-style manufacturing firm to be struggling. But many of the company's switches are destined to regulate the power flow on the rigs that Caterpillar, an Illinois-based heavy-equipment manufacturer, exports in skyrocketing volumes to Asia and Latin America.

According to Don Mayer, Cole Hersee's vice-president, the company's revenue grew a tad last year. Domestic demand for many of its wares slowed, but sales to Caterpillar rose smartly. That, writ large, is the story of America's economy. The housing bust, the credit crunch and a weakening labour market have dragged down domestic spending. The economy has probably slipped into recession—but exports are easing the pain.

America's housing crash continues to worsen. The pace of home building has plunged and is likely to go on doing so. And the latest statistics suggest commercial construction has also started to fall. House prices have dropped by some 10% from their peak and the pace of decline is accelerating. With many sources of mortgage finance evaporating and many unsold homes, prices have much further to fall. Foreclosures and mortgage delinquency rates are already at record levels—some 6% of borrowers, nationwide, are behind on their payments. Homeowners' debt now exceeds their equity for the first time since the Fed has gathered the data. Around 9m homeowners have “negative equity”, mortgage debts greater than the market value of their homes.

Not surprisingly, estimates of the likely losses from mortgage defaults are rising. Worries about the scale of these losses, and uncertainty about who holds them, keep roiling financial markets. In early March spreads began to widen alarmingly on all manner of debt. To stem panic, the Federal Reserve on March 7th and again on March 11th announced new schemes to boost liquidity (see article). Stockmarkets cheered, but the impact is likely to be limited. As the mortgage-related losses mount, credit conditions will tighten, adding to consumers' woes.

The labour market, too, is weakening. The economy unexpectedly shed 63,000 jobs last month, the largest decline in five years. Exclude government-related jobs and the fall was 101,000. Hardest hit were construction and manufacturing, the former a direct casualty of the housing mess, the latter a victim of falling domestic demand, particularly for cars. Employment in retailing also shrank, indicating that the pain is spreading more broadly. Unemployment is still low. The jobless rate fell only slightly, to 4.8%, yet this is more a sign of weakness than strength as the number of Americans looking for work plunged.

But amid the gloom, one bright spot remains: America's export sector. Exports increased twice as fast as imports in 2007, narrowing the trade deficit for the first time since 1995. In recent years, the widening trade deficit has dragged down America's output growth. Now trade is keeping the economy afloat. In the last three months of 2007 the combination of growing exports and shrinking imports added nearly a percentage point to the annual rate of GDP growth, while the economy overall grew by only 0.6%.

Thanks to high oil prices, America's trade deficit widened in January (see chart), but if oil is excluded, the deficit is shrinking fast. Imports are slowing as consumers and firms cut back, while the combination of a weak dollar and still-strong global growth means exports of goods and services are rising smartly. Cheaper labour costs are also encouraging foreign direct investment, which was up a quarter in 2007.

The primary beneficiaries have been commodity producers, the hospitality industry and certain types of manufacturers. Farm incomes are increasing rapidly. Mining is booming. Visits from overseas were up 10% in 2007 (see article). Foreign demand for advanced machinery is huge; exports of civilian aircraft, drilling tools, telecommunications equipment, agricultural machinery and excavators all rose at double-digit rates in 2007. Caterpillar's North American machinery sales were down 11% last year, but its business with Latin America increased by 24% and with the Asia-Pacific region 31%. The company is predicting bumper growth again in 2008. In some industries the shift has been dramatic. Exports of iron and steel products rose 21% in 2007, while imports fell 17%.

Resources are shifting into these industries, helping to cushion the downturn and reorient America's economy. While employment in construction is plunging, export-related manufacturing and mining employment is at its highest level in a decade. Though American manufacturing is losing 50,000 jobs a month, past downturns have typically seen lay-offs at twice that rate. For all that, the effect on jobs will be limited. Mark Zandi, chief economist at Moody's Economy.com, points out that export-related manufacturing, in particular, is highly productive and therefore less prone to mass hiring. Export-related manufacturing and mining account for some 8% of GDP but only 1.5% of American employment. The weak dollar has rendered American labour more competitive, but not enough to rejuvenate low-margin, labour-intensive manufacturing in industries such as textiles, furniture or paper products.

The big question is whether exports can remain buoyant even as the rest of the economy slides into recession. Much depends on how far an American downturn—and the global fall-out from the mortgage bust—weakens growth in the rest of the world. Some slowing is inevitable, particularly in other rich economies, destination for around half of America's exports. But many emerging economies are more resilient than in previous American recessions. In earlier global downturns, American consumers saved the global economy. Now it may be the other way around.