U.S. exports dropped for the first time since the 2009 Great Recession. The Department of Commerce recently reported a nearly 5 percent fall in American goods and services sold abroad in 2015, which is leading to speculation of whether the economy will contract.
Exports represent approximately 13 percent of GDP and their decline represents “the weakest part of the economy,” says Jim O’Sullivan, chief U.S. economist at High Frequency Economics, a financial services consulting firm.
Revenues from foreign sales has been an ongoing concern in recent years. In 2010, the Obama Administration tried to address this issue by launching the National Export Initiative (NEI) to double exports in five years. According to the U.S. Census Bureau, exports only grew 48 percent from 2009 to 2014 compared to 80 percent from 2003 to 2008. A 5 percent decrease in 2015 plus NEI’s falling short of its goal in 2014, could be considered a significant failure by the Obama Administration. On the other hand, it could be argued that this calculation does not account for market forces outside of national control.
Sluggish foreign markets are partly to blame for the recent decline and experts are cynical that performance will fluctuate upwards. Citigroup forecasts a 2.8 percent growth in the global economy for 2016, only slightly higher than its 2015 forecast of 2.6 percent. The International Monetary Fund cut its 2016 expectations from 3.6 percent in October to 3.4 percent in January. If the IMF is correct, then the rate of expansion at 3.4 percent will remain unchanged for the fourth year in a row.
Horizontal growth abroad has been a trade challenge, but the significant difficulty is the strength of the dollar. American currency climbed 26 percent against the euro and 44 percent against the Japanese yen since 2011 according to OANDA. Higher exchange rates increase the price on American products in foreign markets. The effect makes the U.S. less competitive in the global marketplace and drives down cash flow. Even with assuming that foreign sales will remain at the same level despite the increase cost, these revenues aboard now convert back to less dollars compared to 2011.
In August 2015, Federal Reserve Vice Chairman Stanley Fischer said, “It is plausible to think that the rise in the dollar over the past year would restrain growth of real GDP through 2016 and perhaps into 2017 as well”.
So far America’s $17.9 trillion economy remains resilient, while exports have dragged due to foreign markets and expensive currency. A boost in exports would push up the flat line growth trend. However, there are other promising economic indicators like less than 5 percent unemployment.
Hourly wages increased 2.5 percent and consumer spending climbed more than 3 percent since 2014. Last year’s economic performance of 2.4 percent growth is a repeat of 2014. A steady rate is not ideal, but is better than a decline.
It is debatable whether the domestic growth in 2016 will exceed the rate of the last two years, but there is little contention that foreign demand can and will foster an economic boom in the near future. The only consolation is that a continued decline of exports will unlikely depress the economy in the next few quarters.