11/09/2009

For decades, consumer spending led the U.S. economy. For a number of reasons, the U.S. consumer will not be leading the way to economic recovery this time. Rather, investors should look to export investment for GDP growth.

The U.S. consumer was responsible for 67% of GDP in 1980, growing it to 75% in 2007. Low cost imports helped to spur this spending spree. Americans spent more than it produced causing the current-account balance to go from a 0.4% of GDP surplus in 1980 to a deficit of almost 6% in 2006. Savings rates fell from 10% of disposable income in 1980 to just about zero in 2007. Along the way household debt rose from a reasonable 67% in 1980 to an unsustainable 132% of disposable income in 2007.

With the credit crisis and the devaluation of assets, especially houses, more than $13 trillion in consumer wealth is gone. Now U.S. consumers are saving more than 7% of their income as they struggle to replenish their depleted savings and retirement accounts. It will take many years for them to repair their finances. Economists now expect consumer spending to return to a 2% growth rate once the economy is in full recovery mode. In prior expansions, consumer spending had been 3.4% on average. As a result, the U.S. economy will not receive the same positive affect from increased consumer spending as in the last two decades.

It is looking like export biased growth will take up the slack to encourage export led GDP. For example, in June, GE announced it would start to make a low-energy water heater in Louisville, Kentucky, a product that was made in China. In addition, the company is creating a software research center in an old auto manufacturing plant in Michigan, with the goal to produce software for its manufactured products sold worldwide.

Larry Summers, President Obama’s chief economic advisor recently commented, “The rebuilt American economy must be more export-oriented and less consumption-oriented.” In California, the state whose government is turmoil over the huge deficit they are running is showing signs that the export investment is recovering more quickly. The state’s manufacturing employment has shrunk less reflecting its large exposure to Asia. Looking at the number of containers loaded for export from California ports shows export biased growth of manufactured products, agriculture commodities, and raw materials. All are positive signs that the nation’s largest economy is leaning to export investment to help its economy recover.

Helping to fuel the growth of export GDP is the falling U.S. dollar, which makes U.S. exports relatively less expensive when sold in foreign countries that do not tie their currency to the dollar. However, trade with countries such as China, who peg their currency to the dollar, will not see lower cost U.S. goods and services from a falling dollar until they change their policy.

According to the second quarter U.S. preliminary GDP report, real exports of goods and services decreased 7.0 percent, compared to a decrease of 29.9 percent in the first quarter. While still falling this is a vast improvement, especially when compared to imports. In the same report from the Bureau of Economic Analysis (BEA), real imports of goods and services fell 15.1 percent in the second quarter compared to a drop of 36.4 percent in the first quarter.

One of the major constraints to the expansion of export GDP has been the high cost of labor in the U.S. compared to the rest of the world. Workers on the assembly line in an auto plant could count on $45 per hour or more in pay along with extremely lucrative benefits. With the near collapse of the auto industry and the recognition that global competition is here to stay, many unions and employees now recognize they must lower their salary expectations if they wish to keep their jobs. For example, at the GE plant to build energy efficient water heaters in Louisville, the union has agreed to $13 per hour for new employees as well as a freeze in wages until 2011. It will take changes like these to make the U.S. export economy more competitive.

Contributing to a sustainable export GDP are:

• The falling U.S. dollar;
• Recognition by the government that exports must become a more important part of the economy;
• Growing middle class in the emerging countries, and;
• A cost structure that is more competitive for companies that depend on exports.

The sectors of the economy that will benefit the most from the growth of an export GDP are Technology, Industrial, parts of Healthcare especially biotechnology, and parts of the Financial Services sector that serve the export business. Export investment in these sectors offer us the best longer term opportunities. The export GDP is one of the investing themes that should provide market-beating results for several years to come.

For those who want to learn more I suggest reading:

Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis is an excellent book on how to predict macro moves of the market.