Will Exports Save the U.S. Economy?
Monday, July 25, 2011
With consumer confidence shaky, businesses facing much uncertainty, and government spending constrained, it is entirely reasonable to look abroad for growth. But the picture will be clearer if one removes the rose-colored glasses.
In an uplifting commentary last week, NPR’s David Frum opined that U.S. exports were the neglected good news story of the U.S. economy. Reviewing the export statistics, he reported: “May fell a little short, but the United States is well launched to increase exports in 2011 by 25 percent over—and to double exports by 2014.”
Such a doubling would meet the goal of the Obama administration’s National Export Initiative. To put the economic importance of exports in perspective, in 2010 the U.S. economy produced $14.6 trillion of goods and services, including exports of $1.8 trillion. That’s a smaller percentage than for most economies, but it’s not trivial.
But how do we know if the country is on track to meet the administration’s goals? The future is notoriously difficult to predict. Of a couple of imperfect approaches, one popular one is to look at recent trends and extend them. If one takes that approach, though, the starting point is critically important. As an extreme example, if we started looking in April 2011, we would see an export drop of almost $1 billion dollars into May. Extrapolate that decline and you never approach the lofty export goals.
That’s foolish, you might say. One month is far too short a time period to discern a trend. That’s right, of course. These economic variables jump around and we need to look at a longer stretch to have any confidence in our predictions.
If we went back to the beginning of 2006, we would find a growth rate just over 5 percent, which would support a doubling in 13 or 14 years.
If we go back to the beginning of 2009, we see exports growing at an annual rate of almost 17 percent. That’s more than enough to double in five years. By this measure, everything is on track.
But why is that the right time period? Not only was January 2009 the start of the Obama administration, it was also very near a recent low point in U.S. exports. In the wake of the global financial crisis, exports dropped to a level not seen since the fall of 2006, wiping out years of growth.
What if, instead, we went back to the beginning of 2006 and looked at this longer trend? Then we would find a growth rate just over 5 percent, which would support a doubling in 13 or 14 years.
The chart below shows monthly U.S. exports since the start of 2006. The data is modified so that a straight line represents a constant rate of growth (a natural log, for you math fans). The sharp plunge is one depiction of the impact of the global financial crisis. The blue line is the best fit for the last five years, showing a growth rate of 5.19 percent.
The moral is not that January 2006 is the optimal starting date, but rather that extrapolations are very sensitive to such choices. That’s another way of saying that the assumption of a constant growth rate in exports does not fit the data very well.
There are alternatives to simple extrapolation, of course, but they are unlikely to reassure. Instead of projecting from past experience, one could recall that the demand for U.S. exports depends on the economic health of target markets. If our trade partners flourish and grow, they will demand more goods and services from the United States. Yet Europe is teetering on the brink of crisis. Japan is coping with the aftermath of a natural disaster. And moves to win greater market access for U.S. exports in Asia (South Korea) and South America (Colombia) have stalled over domestic U.S. politics.
With consumer confidence shaky, businesses facing a number of sources of uncertainty, and government spending constrained, it is entirely reasonable to look abroad for growth. But the picture will be clearer if one removes the rose-colored glasses.
Philip I. Levy is a resident scholar at the American Enterprise Institute.
FURTHER READING: Levy wrote “The Feds as Stock Speculators,” “Protection Rolls On,” and “Will the President Confront His Base On Trade?” He has also recently published “Trade Fireworks,” “The United States and China: Macroeconomic Imbalances and Economic Diplomacy,” and “The U.S. Trade Agenda: Comedy, Tragedy, or Thriller?”
Image by Darren Wamboldt/Bergman Group.