from Follow the Money

Dollar depreciation has increased exports. But Andrew Tilton is also on to something … to export you need to invest in your export sector

August 18, 2006

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US exports are enjoying their strongest three-year period of growth since 1987-89.    If growth rate of the first half of the year is sustained, the cumulative increase in US exports between the end of 2003 and the end of 2006 will be around 42%.   The increase from the end of 86 to the end of 89 was around 57%. 

I remained amazed that so many people think that dollar depreciation has had no impact. 

87-89 was also a period of dollar weakness.    As is the current period. Consider the following graph.

andrewtildo_1

 The connection between dollar depreciation and a surge in export growth (with a llag) seems pretty clear.

The recent fall in the dollar actually has been far more pronounced if you just consider the major currencies than if you look at the broad dollar …

andrewtildo2

 

There is, alas, another similarity between the current period and the 87-89 period.   In both cases, a period of strong export growth followed a period of weak export growth.   

As a result, by the end of 2006, exports will be about the same share of US GDP as in 2000.    Exports were 10.9% of US GDP in 2000.  They will be around 11% of US GDP in 2006.   Exports were around 11% of US GDP in 97 as well.

Reducing the trade deficit by raising exports to 15 or 16% of US GDP will require a lot of new investment.  But, as we all know, the US has spent the past few years investing in its residential housing stock.   Not investing in new factories.   Those factories are being built in China.    Andrew Tilton of Goldman Sachs has made this point well over the past year.  This week’s Economist took note

In reality, however, America's deficit is unlikely to close without its industrial structure changing substantially. Only about a quarter of what it now produces can be sold across borders. Andrew Tilton of Goldman Sachs has calculated that to boost exports and narrow its deficit to 2.5% of GDP by 2010, America would need to increase its manufacturing capacity by about 17%. But until this year, it was housing, a non-traded good par excellence, which has attracted extra labour and capital. In 2005 the share of construction workers in payroll employment was the highest in 50 years, and residential investment accounted for the biggest chunk of GDP since 1951. Schumpeter, no doubt, would call this “maladjustment”.

The US presumably had a certain amount of spare capacity in its export sector coming out of the post tech boom export slump.   But at some point that capacity will be used up.

Growing US exports will require new investment in the tradables sector.   Not investment by US firms in China.   But investment by US, European, Japanese and even Chinese firms in the US.    

That is one reason why I disagree, in part, with Nouriel’s argument that the US should be grateful that the rest of the world is willing to lend us their surplus savings cheaply.   He recently wrote: “the US badly needs this cheap foreign financing” and argued that the US shouldn’t criticize other countries for supplying the US with the financing it needs to make up its savings deficit. 

Nouriel tends to think the US savings deficit is primarily – if not exclusively -- the product of the United States’ own policies.  I, by contrast, don’t think the US savings deficit is entirely independent of the rest of the world’s savings surplus. 

Yes, that means Bernanke has convinced me – I find it hard to argue that there is not a savings surplus in China and the oil exporting countries right now.   At a minimum, the easy availability of foreign financing has lowered the cost of running significant structural fiscal deficits in a country that doesn’t have any surplus private savings.   The structural fiscal deficit didn't stand in the way of a housing boom.  And I don’t think the US will begin to adjust in real way until the world becomes a bit less willing to lend the US its savings surplus.

This argument has a corollary on the trade side.   Unless the RMB/ dollar adjusts, I don’t think the investment Tilton demonstrates are necessary will be made in the US  tradables sector.

Knzn argues – persuasively – that only a surge in exports can save the US from a growth slowdown as the domestic economy cools.  Yet unless something changes, I expect the pace of US export growth to slow – not rise – in the near future.   

Lots of things matter for export growth.  Past investment in tradables production matters.   That may be a problem soon.  The pace of global growth matters. Alas, global growth seems more likely to slow than to rise.  The level of the dollar matters.   Right now, the dollar is weak v. Europe and Canada, but not against many other currencies.   Recent moves in the dollar also matter.   The big fall in the dollar came in 2003.    Since then it has been treading water, more or less.  Eventually, the lagged impact of this move will wear off ...

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