U.S. Makes Progress Toward Rebalancing

Manufacturing output is returning to pre-recession levels, exports are continuing to grow,and the trade balance is shrinking.

Manufacturing output has risen more rapidly than output overall; to some degree this is unsurprising as manufacturing is highly procyclical.

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Figure 1: Log manufacturing output (blue) and GDP (red), in Ch.09$, rescaled to 2009Q2=0. Source: BEA, BLS via FRED, and author’s calculations.This graph indicates that real output in manufacturing has grown 8.8% more rapidly (cumulatively, in log terms) than GDP as of 2013Q3. This is not dissimilar to that experienced in the last two recoveries.

However, exports have grown more rapidly than in the last recovery, which is notable given the general lackluster state of the world economy (Europe, China).

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Figure 2: Log exports of goods (blue), exports of services (red), and goods and services (gray). Source: BEA, 2013Q3 3rd release, and author’s calculations.Exports of goods is not quite the same as exports of value added, given vertical specialization (that is, exports incorporate imported inputs; see discussion here). However, the pattern is pretty clear.

On the other hand, as confirmed in November’s trade balance figures, US net exports as a share of GDP are increasing.

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Figure 3: Log trade weighted (broad) real value of the dollar, 2010=0 (blue, left scale), and net exports to GDP (red, right scale), net exports ex-oil imports (green, right scale), and net exports ex.-oil (black, right scale). Source: Federal Reserve Board vis FRED, BEA 2013Q3 3rd release, BEA/Census trade releases, and author’s calculations.Note that although net exports including petroleum imports and petroleum product exports are increasing markedly through 2013Q3, even excluding those items (the black line), we see a 2.2 ppts improvement relative to 2005Q4.

Irwin/Wonkblog argues that fracking is a big part of the reason for the improvement in the trade balance. That’s confirmed by Figure 3. But it’s useful to keep in mind that of the 2.9 ppts improvement, 2.2 ppts comes from non-oil and non-oil-product trade.

(Fracking might have helped US competitiveness by driving down energy-related production costs; I think the jury is still out on that issue, as discussed in this post).

Looking forward, continued progress depends on the value of the dollar (which might pop up if the taper proceeds rapidly, or if there is a new sovereign debt crisis overseas), and the extent to which growth in East Asia is consumption based.

This piece is cross-posted from Econbrowser with permission.