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My Focus on Exports Not Employment

Posted by Larry Doyle on August 3, 2012 9:50 AM |

The monthly jobs report came out and is viewed as slightly better than expected but provides both sides of the political debate sufficient fodder to spin it to their advantage.

While equity markets want to put a happy face on the report (an increase in non-farm payroll of 163,000 jobs along with an uptick in the unemployment rate to 8.3%), I have little real confidence in the report signaling meaningful improvement in our economy.

Why am I concerned that our economy is poised to slow and potentially contract? Forget the employment report, let’s look elsewhere to get a better read on economic growth going into year end. 

As reported the other day by the Institute of Supply Management, net exports have fallen off a cliff over the last two months. That development is so troubling because prior to the last two months our net exports had grown for 35 straight months. Let’s take a harder look at the ISM report,

ISM’s New Export Orders Index registered 46.5 percent in July, which is 1 percentage point lower than the 47.5 percent reported in June, and represents the second month of contraction in the index since June 2009, when the index registered 49.5 percent. Prior to this current two-month period of contraction, the New Export Orders Index had registered 50 percent or above for the past 35 consecutive months.

New Export
Net Index
Jul 2012 77 10 73 17 -7 46.5
Jun 2012 78 15 65 20 -5 47.5
May 2012 80 17 73 10 +7 53.5
Apr 2012 79 26 66 8 +18 59.0

Some in the audience may say that I am overly emphasizing the impact of exports on our economy as it has historically represented not even 15% of real GDP.  Well, perhaps we should put a discount into some of those historical models.

Let’s review an essay released recently by an economist and analyst at the St. Louis Federal Reserve aptly entitled, Get By With a Little Help From My  . . . Other Exports,

During the 2007-09 recession, the decline in exports did not affect GDP growth as severely as declining consumption and investment, but the recovery scenario has been quite different: Exports accounted for almost half of the average GDP growth in 2010-11, a much larger fraction than during the pre-crisis period.

Moreover, while many analysts are focused on developments in the EU, the authors highlight that in terms of exports, our economy is increasingly more impacted by the slowing in emerging economies.

Here are two great BEA produced bar graphs highlighting these two key points:

Contribution of Components to the U.S. Real GDP Growth Rate

U.S. Exports Share in 2000 and 2011 by Destination

With the global economic engine centered increasingly within the emerging economies, when they slow down — as they are — our economy follows.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • LD

    Interesting graph highlighting developments with the Baltic Dry Index which is not perfectly correlated with global economic activity but is a good indicator as it is,

    A shipping and trade index created by the London-based Baltic Exchange that measures changes in the cost to transport raw materials such as metals, grains and fossil fuels by sea. The Baltic Exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and time to delivery (speed).

    The Baltic Dry Index is a composite of three sub-indexes that measure different sizes of dry bulk carriers (merchant ships) – Capesize, Supramax and Panamax. Multiple geographic routes are evaluated for each index to give depth to the index’s composite measurement.

  • Barry

    Don’t be so negative, Larry, I have read a number of articles illustrating the export engine will help put us back on top.

    We have huge energy resources (shale oil and natgas) that are just being developed/exploited. The cap ex to develop the necessary infrastructure for both domestic and export markets (LNG) could provide a huge boon. Further, a number of manufacturing jobs have and will continue returning (mostly from Asia – shipping raw materials there and manufactured goods back is too expensive). The low cost energy will drive this job growth further.

    Once Washington gets behind and responsibly drives this investment we will be golden!

    Oh right, never mind, we are f-&^%*d!?!

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