Behind the Strength in Exports
The Bureau of Economic Analysis estimates that GDP grew at an annualized rate of 1.7 percent in the second quarter. While this is an improvement over its advance estimate of 1.5 percent, it still means that GDP growth decelerated slightly from the first quarter, when it came in at 2 percent. Though Personal Consumption Expenditures slumped from a growth rate of 2.4 percent in the first quarter to 1.7 percent—as the production growth of goods practically stagnated—they were still the largest contributor to GDP growth along with exports, which accelerated to a 6 percent clip from 4.4 percent in the previous quarter.
In fact, despite the recovery’s frustratingly slow growth, exports have averaged 8 percent yearly growth since the beginning of 2010 and continue to reach record levels in terms of total nominal and real dollars. The ratio of exports to GDP has been growing at a far faster rate in the current recovery than in an average one. Why are exports growing at an unprecedented pace while the rest of the economy remains sluggish?
This strength is even more puzzling when placed in the context of the global slowdown. With many European countries in or on the brink of recession, and fast-growing emerging countries posting below-average growth rates, we would expect to see some slowing in export activity. Exports have cooled from double-digit gains seen in 2010, but they are still averaging a 4.5 percent growth rate over the last four quarters, which is largely in line with previous expansions.
Although the recent global slowdown is likely weighing on foreign demand for American goods and services, U.S. exports have been steadily increasing since the mid-1970s. The forces of rapid growth, industrialization, and declining trade barriers have led to a growing demand for American goods and services that has spanned several decades. Looking at the ratio of exports to GDP we see that from the postwar period to the mid-1970s exports comprised about 5 percent of GDP. In the past decade they averaged roughly 11 percent of GDP and are currently quickly approaching 14 percent. Some of the strength in exports seen throughout the current recovery can therefore be attributed to this long-run trend.
In addition to foreign demand, another factor that determines the level of exports is the value of the dollar relative to other currencies. If the dollar is depreciating, we would expect to see exports increase since dollars become cheaper to foreigners, which in turn allows them to import a larger quantity of goods and services. The dollar has declined relative to major currencies throughout most of the last decade and has hit multidecade lows since the onset of the crisis and throughout the recovery. This depreciation has created favorable conditions for U.S. exports and has likely helped contribute to their strength as well.
In summary, the combination of long-term trends of rising foreign demand and a declining dollar likely account for how much better exports are doing, relative to GDP, in this recovery compared to previous ones. In the short term, though, if the global slowdown continues to take its toll, we will likely see some cooling down in exports.