U.S. Foreign Trade Activity:Recently A Smaller Share of U.S. GDP

Until the current recession started, the U.S. level of foreign trade (exports PLUS imports) was rising sharply with the expansion of the worldwide economy. As a percentage of overall U.S. economic activity, trade was just shy of 30% for roughly per year as economic activity rose. Foreign trade's importance to the U.S. economy increased from 25% of real GDP as recently as 2003 and it nearly doubled since the early 1980s. It bares emphasizing that the total trade figures matter because they not only reflect foreign demand for U.S.-made products but the U.S. demand for products made elsewhere.

The data used for this analysis are the real foreign trade figures from the U.S. National Income and Product Accounts. These are available in Haver's USECON database.

Since the recession began, the level of U.S. foreign trade has contracted sharply. Trade's share of real GDP fell to 26%, a decline back to the level of late-2003. These figures do not, of course, reference the U.S. trade deficit which is more a function of the foreign exchange value of the dollar and relative economic growth rates in the U.S. versus those abroad. Though the U.S. employment figures do not reflect the "substitution" effects of foreign for domestic workers, clearly both groups have suffered from the reduced level of trade activity.

The recent decline in trade reflects both lower exports and imports. As an aside, the trade deficit recently fell sharply with the increase in U.S. competitiveness. The dollar's value fell 25% since 2001 and U.S. productivity surged. Behind the decline in trade is an 11.7% share that exports maintain of the U.S. economy. That's down from the 13.0% average for all of last year, however, it still roughly equals the share during all of 2006. More importantly, it's up from 10% in the mid-1990s and from 5%-to-6% in the '80s. In the early 1950s, exports accounted for just 3% of U.S. economic activity.

Imports have fallen to an even greater degree of late than exports; hence, the improvement in the real U.S. trade deficit. Imports fell to 14.3% of real GDP last quarter after the increase to a peak of 17.1% during 2007. Like exports, however, their presence in the economy has steadily surged. It's still up slightly from ten years ago and from 8% in the late- 1980s. In the early 1950s imports accounted for a miniscule 3% of U.S. economic activity.

Individual countries' trade figures give some background to the trends addressed above. Overall, the huge increase in China's trade surplus to $32B by the end of last year from a modest surplus as recently as 2004 was driven by a ten-fold jump in exports from the late-1990s. It fell slightly early this year. In Japan, exports last year were up seven times from the early-1980s and the trade surplus had been running a fairly stable, large $5 to $10B for twenty years. However, that position collapsed to a deficit last year and continued so early this year at -$2B. Germany's net foreign trade balance also ballooned to a $22B surplus last year from $6B ten years earlier as exports rose four-fold. The surplus fell back to $10 early in 2009.

These Main Economic Indicators from the OECD are available in Haver's OECDMEI database.

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Japan’s consumer confidence is at a year and one half high. The government has upgraded its economic assessment for the third month in a row. Industrial output is on a tear. IP is up for three months in a row. The past two month’s gains were on monthly increases of better than 5.5% each. With the Yr/Yr month growth rate at -27.6%, over three months Japan’s IP is up at an annualized pace of 67.8%.

Textiles, mining and investment goods are major groups with declines over three months. It is interesting and telling that for Japan investment goods output has lagged so badly. Despite high unemployment virtually everywhere Japan’s consumer goods output is up and investment goods output has been decaying. This month for the first time in eight months investment goods output has rising on the month. The business sector has been very hard hit by recession around the globe. Although consumers have been hurt by unemployment and fears of unemployment, consumer most consumers still hold their jobs. Some of the displaced workers fallback on government programs and then there is stimulus spending to try and prime the various economic pumps.

Maybe this month’s output increase of investment goods signals that the forces of growth are finally going to include the business sector and that investment projects have been cut back and postponed all that is possible. But one observation is too thin a reed to seize. For now we can only watch the output reports and look to the corporate earnings reports that will probably remain downbeat. Whenever stirring in the industrial sector is in progress in this cycle it seems to be mild and small compared to past declines. Germany is showing some stirring in its international business orders. Japan now has one-month rise in investment goods output. We think the business sector will mark time for a while longer and that the spread of the end-recession and eventually of the recovery to investment goods is still a work in progress that is lagging behind the consumer recovery.