Internal demand strengthens as external conditions weaken.

Main national economic indicators reveal a solidifying moment of the American economy. In spite of job losses in mining and oil-related sectors, total nonfarm payroll employment increased by 242,000 in February; and although the unemployment rate kept unmovingly, the economy shows signs of very good standing relative to past winter season data. The biggest risk, though, is probably to come from outside the United States. In that regard, the latest data on international trade in goods and services confirm that the economic momentum in being built on the internal demand for goods, whereas the international market weakens. In other words, foreign trade is not adding much to the current economic expansion given that both imports and exports decreased in January. With the dollar as it stands currently, what analysts expect to see is a big inflow of trade, which has not realized yet. That could be somewhat worrisome.

By Catherine De Las Salas

By Catherine De Las Salas

Countries have not found their way in:

Most of the accounts of trade balance declined in January. Countries have not found the way in for commodities even when the US Dollar remains high. In fact, the US Balance of Trade in 2015 exhibited a positive trend with a net gain of U$851 million of dollars (Graph 1 below). In January, imports of goods declined U$2.9 billion as a result of a noticeable drop in the value of Crude Oil imports, and a decrease in Capital Goods. On the other hand, exports of Goods fell U$4.0 billion mainly as a result of small international sales of Capital Goods and Industrial Supplies Materials. Nevertheless, those decreases, exports of services increased especially on Travel for all purposes and transportation.

No analyst expects to see US Exports to grow considerably currently. Otherwise, economists expect overseas countries to take advantage of the current dollar rate, which has not happened yet. US Exports deteriorate due to strong dollar abroad. The deficit in the Balance of Trade continues to grow negatively for the United States in spite of 2015 being a good year. The deficit increased by $U2.1 billion over the year, which correspond to 4.8 percent when compared January 2016 and January 2016. Exports decreased U$12.5 billion over the year as Imports did so too by U$10.5 billion. Over the month changes in the Balance of Trade registered only positive increases in exports of Services. All these data beg the question about international markets. Why countries overseas are not selling to the United States?

U.S. Balance of Trade

Internal demand is gaining momentum:

With almost every international trade indicator declining, what is feasible to infer about the economy is that the internal demand for good and manufacturing is gaining momentum. The evidence rests on employment data. Just in the past three months, payroll data has shown an average increase of 228,000 jobs created per month. Usually, employment creation in January and February are not that good because of the weather. February 2016 employment data exhibited gains in Healthcare (+38,000), Retail trade (+55,000), Food and Services (+40,000) and Construction (+19,000). Retail trade, Food and Services, and Construction usually are affected by weather conditions. This year seems to be different.


Is the Current U.S. Dollar Strong All Over the World?

The “Strong Dollar” factor:

“Strong Dollar” is said to be one of the main causes explaining the poor economic performance of the United States during the first quarter of 2015. United States’ exports were affected by the appreciation of the currency vis-à-vis some of the foreign currencies. Likewise, exports towards the United States benefited from the U.S. Dollar appreciation. In aggregated terms, currencies of major U.S. trade partners, versus the U.S. dollar, have gone up in average by roughly 3.2% in the last five months of 2015. This trend can be seen in the picture below on blue line (1 Broad). Furthermore, a subset of other major currencies that circulate worldwide have appreciated since January by an average of 5.7% against the U.S. dollar, which can be observed in the orange line in the graph below (2 Major Currencies). The euro, instead, has depreciated 8.3% since the beginning of the year (Yellow line in the graph below). There is where the competitive advantage resides for Europe nowadays.


Who’s to blame?

When it comes to blame foreign trade for poor economic performance in US, Asian countries come to mind of Americans. For economic growth on 2015Q1, such a statement seems to be somewhat ambiguous. The graph below shows how major Asian currencies have performed recently. The Yuan, dotted white line in the graph, has been mostly steady for what has bygone of 2015. Otherwise, the currency that has depreciated the most, amongst Asians monetary markets, is the Taiwanese Dollar. The Indian Rupee initiated the year with a downward trending which lasted until the second week of April; then, the Rupee started to gain value against the U.S. Dollar. South Korean currency, the Won, had its lowest value against U.S. Dollar this year by the last week of April. The Won did so after having been depreciating since the first week of March. Dollar from Singapore has also been depreciating since early March after a spike in its value against dollar (Yellow line in the graph).

Currency 2
In order to elaborate these currency series, we took the value of the currency against the U.S. Dollar at its value during the first week of 2015, and use such value as index. The data source is the Board of Governors of the Federal Reserve System, which aggregates the currency data for major U.S. trading partners. The Federal Reserve defines these aggregated data as follows:
1) Broad: “A weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners”.
2) Major Currency: “A weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index currencies that circulate widely outside the country of issue”.
3) OITP: “A weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index currencies that do not circulate widely outside the country of issue.