Global growth, weaker dollar unleash a wave of U.S. exports
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As trade data roll in, an encouraging picture is taking shape for American industry: Helped by a weaker dollar and strong global economic growth, U.S. companies are finding increasingly eager customers abroad.
In the first five months of this year, U.S. exports of goods totaled an inflation-adjusted $376 billion, up 10 percent from a year earlier. Exports of capital goods, such as heavy construction equipment and machine tools, were up even more sharply -- at 15 percent. Goods imports, meanwhile, rose 6 percent to $666 billion, also in inflation-adjusted terms.
With the nation's imports continuing to far exceed its exports, the U.S. trade deficit remains stubbornly wide. But economists say the pickup in export growth relatively to imports is important because it could stabilize the gap between what the U.S. buys abroad and what it sells to the rest of the world. Many economists regard that gap as a major threat to world economic and financial stability.
Accelerating exports would also allow the nation's businesses to keep expanding despite a projected slowdown in economic growth at home.
"You're starting to see a story that's fairly clear and fairly encouraging," Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, says of the trade picture. "There have been false starts before, but so far so good."
The improvement in exports stems in part from the delayed impact of a weaker dollar, which has given U.S. producers a competitive edge in pricing. Since 2002, the dollar has lost about 14 percent of its value against the currencies of major U.S. trading partners. It takes time for changes in exchange rates to produce shifts in trade flows, in part because customers are often slow in switching suppliers.
In addition, Europe and Japan, the world's second- and third-largest economies, respectively, are growing faster than most economists had expected, while the robust growth in emerging economies such as China, Brazil and India shows little or no sign of slowing.
As those foreign markets gear up to meet growing demand, they need more precision pumps, computer-aided design systems, big-lift cranes and other high-end capital equipment -- just the kind of big-ticket products U.S. companies are particularly good at making.
"You've got two positives: the improvement in domestic demand in overseas economies, and an effective repricing of U.S. capital goods" from the weaker dollar, says Jim Meil, chief economist at Eaton Corp., which makes everything from electric motors to high-tech power systems.
Citing a surge in global demand, the Manufacturers Alliance, an organization that represents U.S. manufacturers, said Tuesday that it expects U.S. export growth to accelerate to 7.7 percent this year and 9.4 percent in 2007 from 6.9 percent in 2005. "Demand is so strong, not only are we able to sell to the rest of the world but to broader parts of the world," says Cliff Waldman, the group's economist.
In the first five months of 2006, Japan, China and Brazil increased their purchases of U.S. machinery by 22 percent, 16 percent and 31 percent, respectively, from a year earlier, according to the Commerce Department. That partly reflects a pickup in business investment, which grew at an annualized first-quarter rate of about 13 percent in Japan and 9 percent in Germany. In China, investment during the first five months was up 30 percent from a year earlier.
In a recent interview, Herbert Henkel, chief executive of diversified manufacturer Ingersoll-Rand Co., estimated his company's sales growth in China, where the company has a significant manufacturing presence, at 30 percent to 50 percent a year, compared with 8 percent to 10 percent in the U.S. "That's like the edge of chaos," says Mr. Henkel, whose company's products range from air compressors to electronic locks.
Some companies that have recently posted second-quarter earnings have reported rising overseas revenue, though that increase has sometimes reflected both rising exports and rising sales by their local subsidiaries overseas.
Tuesday, United Technologies Corp. raised its earnings forecast for 2006, saying faster growth abroad would boost sales. In a conference call, Vice President Greg Hayes said that certain parts of the company's business are growing "at more than two times" the rate of world-wide gross domestic product, due in part to "good penetration in emerging markets."
In a sign that the global appetite for big-ticket consumer items is also healthy, Harley-Davidson Inc. reported that its international sales -- all of them exports -- grew more than 17 percent in the second quarter from a year earlier, well above its 8 percent growth rate in the U.S. "We anticipate that our international growth will continue to outpace domestic growth," said Tom Bergmann, the motorcycle maker's chief financial officer.
To be sure, plenty can still go wrong. The U.S. trade deficit has shown signs of stabilizing before, only to resume its expansion. Because the U.S. sells much less than it buys from abroad, exports must grow twice as fast as imports just to keep the trade deficit stable. And the global economy remains heavily dependent on the U.S. consumer: If Americans decide to cut their spending sharply, both global growth and U.S. exports would suffer.
Faster export growth also could complicate life for the Federal Reserve, which is trying to figure out how high U.S. interest rates should be to contain inflation pressures. If a better trade balance stokes domestic growth, the Fed might have to push rates up more than it otherwise would to keep prices from getting out of control.
"You're going to have a little more inflation risk," says Goldman Sach's Mr. Hatzius.
So far, however, the indications are positive. Last week, the U.S. posted a trade deficit of $63.8 billion for May, down from $64.2 billion in December. The smaller-than-expected gap led some economists to boost their estimates of the inflation-adjusted growth rate for U.S. GDP in the second quarter by as much as half a percentage point to more than 3 percent. (The government will report its advance estimate of second-quarter GDP growth July 28.) That comes as forecasters are expecting a slowdown in inflation-adjusted GDP growth from an annualized rate of 5.6 percent in the first quarter of this year to well under 3 percent by the first quarter of 2007.
Recent signs also suggest that the housing market and consumer spending could cool off faster than previously thought. "For a long time people have been talking about a transition for the economy, a reduced dependence on the consumer and housing and more reliance on exports and business investment," says Nigel Gault, U.S. economist at consulting firm Global Insight. "The latest news on exports is a signal that maybe that's happening."
The export trend should also be pleasing news to the U.S. government, which has tacitly allowed the dollar to slide in the hopes that the decline would help stabilize or narrow the trade deficit. So far this year, the dollar has fallen 5.3 percent against the euro and 0.5 percent against the yen; as of Tuesday, a euro bought $1.2508 and a dollar bought 117.38 yen.
The dollar-euro exchange rate is particularly important for U.S. exporters, because European -- particularly German -- producers of capital goods are among their biggest competitors for customers all over the world.
Take, for example, Hoffman International Inc., Piscataway, N.J., which sells heavy equipment such as oil-drilling supplies to Russia, Kazakhstan and other parts of the former Soviet Union. Tim Waters, Hoffman's president, says he expects his exports this year to grow 50 percent to $15 million, in part thanks to the changing dollar-euro exchange rate.
"We're competing against European products, so it's absolutely helping us get deals," says Mr. Waters. "We are definitely counting on exports to buoy our entire business as domestic demand slows."
In heaviest demand among U.S. companies' foreign customers are the kinds of technology-heavy equipment and supplies that can help them produce things cheaper and faster. "Most of what U.S. capital-goods makers and exporters are selling is, in effect, productivity," says Mr. Waldman of the Manufacturers Alliance.
Glen Tellock, president of Manitowoc Crane Group, a unit of Wisconsin-based Manitowoc Co., says his exports to Europe and Asia are up about 20 percent and 30 percent, respectively, in the first half of this year. He says larger crawler, all-terrain and tower cranes -- the kind of technologically advanced equipment that can help speed up big construction projects -- are selling particularly well in China as that country prepares to host the 2008 Olympics.
"They don't have until 2011, they have to get this done by 2008," he says.
First Published July 19, 2006 12:00 am
