U.S.: A TOAST FOR THE NEW YEAR: HAPPY REBOUNDRising demand and a narrowing trade deficit will supply the good cheer
In recent weeks, the economic signposts have pointed all over the place. Weekly unemployment claims have yo-yoed. The trade deficit has swung wildly. Housing has looked surprisingly strong, as has industrial output, but factory orders dropped. What's an economy watcher to make of all this?
Beneath the weekly and monthly squiggles in the data, a trend of renewed strength is emerging. Economic growth in the fourth quarter appears to have picked up from its 2.1% pace in the third quarter, led by new energy in consumer spending and by a substantial narrowing in the trade deficit.
Domestic demand is rebounding from its third-quarter sluggishness, and even foreign demand is picking up, based on the October surge in exports. Most important, manufacturers are feeling the updraft in their order books (chart). Unfilled orders are piling up, and producers have increased their payrolls, lengthened their workweeks, and sped up their production lines.
In particular, the durable-goods sector, which includes long-lasting items ranging from air-conditioners to airplanes, is holding up well--if not gaining momentum. That rebound is why the economy is expected to do well in early 1997.
TRUE, NEW ORDERS for durable goods fell 1.6% in November, but the drop was not broad, and the three-month trend is rising again. Orders tend to be volatile from month to month. Indeed, bookings for electronic equipment, such as semiconductors and telecommunications gear, plunged 9.3% in November--the major source of the month's weakness--after soaring 16.9% in October.
Overall orders so far in the fourth quarter are well above their third-quarter average. Orders for capital goods are also ahead of their third-quarter level, despite a 7.8% drop in November bookings.
Moreover, unfilled orders continue to rise. The order backlog rose 0.3% in November, after a 1.2% jump in October, and it has been in a rising trend for a year. Orders for capital goods, especially aircraft, are also piling up.
Consumers have a lot to do with manufacturing's upbeat outlook. Their inflation-adjusted outlays for goods and services rose 0.3% in November, on the heels of a 0.4% increase in October. Even if December outlays do not rise, which seems unlikely, real consumer spending will grow at a 2.7% annual rate for the fourth quarter, up from the third quarter's paltry 0.5% pace (chart). Reports from retailers suggest that holiday buying, while not gangbusters, was at least healthy enough.
Outlays for durable goods accounted for 40% of the November spending gain, led by a 1.9% jump in furniture and appliances. Services contributed the rest of the rise, as the unusually cold weather lifted utility bills. Outlays for nondurable goods fell 0.2%, but that reflected a drop in food purchases, which seems to be a quirk related to the late Thanksgiving holiday. Excluding food, nondurables purchases rose slightly.
Given continued strength in the labor markets, consumers have ample income to keep spending in the new year. Personal income rose a solid 0.5% in November, and adjusted for taxes and inflation, real disposable income increased 0.3%. During the past six months, real income has risen at a 2.9% annual rate, well faster than spending. In the process, households have been able to save more and pay down some of their debt. Indeed, credit-card delinquencies fell in the third quarter for the first time in two years.
STRONGER DEMAND is not confined to the U.S. Prospects are good that rising exports will also keep U.S. manufacturers humming along. Foreign trade is expected to add modestly to growth in 1997, but the outlook is not without some worries, namely the dollar's rise and the unending advance of imports.
Much to the surprise of most analysts, the foreign trade deficit for goods and services narrowed sharply in October, falling to $8 billion from $11.4 billion in September. Imports slipped 0.7%, while exports jumped 4.2%, lifted by aircraft exports.
The October drop means that the trade gap began the fourth quarter below its third-quarter average. However, Japan has already said that its trade surplus with the U.S. soared 31% in November, led by a huge jump in car shipments. That deterioration alone could mean an increase of about $1.4 billion to the November U.S. trade gap. Even so, the quarter's net-exports figure that goes into the gross domestic product data was likely smaller than the third-quarter number.
Trade may temporarily worsen again in the winter. That's because in each first quarter of the past four years, net exports have widened by an average of $17.8 billion compared to the fourth-quarter level. That has cut about one percentage point off GDP growth. All the widening can be traced to a weakening in exports, which may reflect the weather rather than any one-quarter falloff in demand.
THE OUTLOOK, THOUGH, depends on economic, not atmospheric, conditions. Looking ahead, the prospect of stronger world growth clearly is a plus for exports, especially capital goods. Foreign sales of capital goods have risen 10.4% from a year ago, leading the 7.2% annual gain in overall goods exports (chart). Demand in 1997 will be strongest among the emerging economies.
The big danger will be the rise in the dollar, which has gained 12.3% vs. a trade-weighted basket of currencies since April, 1995. The dollar has surged to a 3 1/2-year high of 116 yen. The increase of Japanese car shipments in November reflects the loss in competitiveness from a stronger dollar.
So far, the dollar's movement has not affected the prices of many exported goods. In fact, export prices in November fell 0.5%, the sixth consecutive decline. Prices were down 1.3% from a year ago. But U.S. exporters cannot continue to swallow the exchange-rate penalty. As it is, profits earned overseas have fallen for two straight quarters. Unless the dollar weakens sharply in 1997--an unlikely prospect--exporters will have to boost prices or see profits weaken further.
Foreign manufacturers, meanwhile, have been quick to cut prices. Excluding oil, import prices have dropped in six of the past seven months. For the year ended in November, nonoil import prices were down 1.9%. Cheaper imports, of course, will allow foreign goods-producers to expand their already record share of U.S. markets.
In the end, exports and imports will not set the pace for U.S. manufacturers in 1997. Foreign trade is only the icing--domestic demand is the cake. And for now, healthy consumer fundamentals and brimming order books suggest that, after slowing down in 1995 and early 1996, the factory sector is enjoying a sweet upturn heading into 1997.
By JAMES C. COOPER & KATHLEEN MADIGAN
Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.