Slowing Trade Creating Drag on U.S. and Global Economies

Stats Fact of the Week

Foreign trade policies and tariffs have created a great deal of economic uncertainty not only in the U.S., but also globally. Connor Lokar of ITR Economics recently released a very insightful article in the latest NFPA Forecast Report that examines the effect foreign trade conditions are having on the U.S. and global economy, and what they may mean for future trends in our economy.

What you need to know: While exports are not a dominant part of the U.S. economy, the U.S. is still the world’s second-largest exporter, and the slowdown in the U.S. and global trade is likely to cause pain in the second half of 2019.

When it comes to U.S. trade, the perception I tend to encounter is that imports are all that matter. “The U.S. doesn’t make anything anymore,” I often hear, or “We buy everything from China.” These common maxims are likely derived from the fact that we have a perpetual trade deficit.

However, this line of thinking is incorrect. U.S. manufacturing is quite robust. Not only do we create a tremendous amount of products here, we also sell a tremendous number of those products overseas. For this reason, trade wars can cut both ways, potentially harming U.S. exporters as much as we harm the targets of our tariffs and trade barriers. While it is impossible to assign exact percentages, the global wave of protectionism headlined by the U.S.-China trade conflict appears to be taking a toll, with global economic activity on the back side of the business cycle and key global and U.S. export trends moving in a negative direction.

Total U.S. Exports to the World amount to roughly 8.8% of the overall U.S. economy as measured by U.S. Gross Domestic Product. At face value, a small slice of the pie, but to cast it as irrelevant would be a mistake. On a dollar basis, the U.S. exported $1.67 trillion in goods during the most recent 12 months, making us the world’s second-largest goods exporter, behind only China. While we may import more than we export, the chart below shows that the export side of the equation is relevant to the U.S. economy.

Chart 1

The U.S. Exports trend is moving in a negative direction. U.S. Total Goods Exports during the most recent three months totaled $414.0 billion, down 0.5% from the same period a year ago. This is the first-time quarterly Exports have contracted year-over-year since late 2016. The Exports quarterly growth rate typically leads Production through the business cycle by four months and is clearly indicating ongoing downward pressure on the growth rate for the U.S. economy. In fact, post-2000, every time the U.S. Exports trend has moved into negative territory, U.S. Industrial Production has followed suit.

The struggling U.S. Exports trend is likely due to a combination of the strengthening U.S. dollar, the simmering U.S. trade conflict with China, and weaker global demand stemming from anemic growth amongst most other advanced economies.

The trend lines look worse outside the U.S. World Industrial Production was up 2.4% during the most recent 12 months and decelerating; the current growth rate for U.S. Industrial Production is 3.3%. A look to Hong Kong Air Freight, a bellwether for global trade volumes, points to a rather unsettling trajectory for the global economy through the rest of this year:

Chart 2

Hong Kong Air Freight Volume during the second quarter came in 8.2% below the second quarter of 2018. This portends further deceleration in the World Industrial Production trend into at least early 2020.

As U.S. Exports activity goes, the broader U.S. trend lines tend to follow, and slowing or contracting trade activity across much of the globe points to a difficult second half of the year ahead. Living in a globalized economy for quite some time, we often take for granted the importance and value of trade. It allows countries to specialize, creates jobs while raising standards of living, facilitates economic development, and encourages the international competition that ultimately delivers the consumer the highest quality goods and services at the lowest prices. It is important for the U.S. and the rest of the world that the current downswing in trade prove only a symptom of the current business cycle rather than the beginning of a long-term shift away from the global trade system.

Thanks again to Connor Lokar and ITR Economics for their insights into our current and future foreign trade environment. For more ITR Economics articles regarding trends in our economy, download the latest NFPA Forecast Report.

Questions and inquiries can be directed to Eric Armstrong at earmstrong@nfpa.com or (414) 778-3372.