News that exports rose last month was something to cheer, but it will be consumption at home — not abroad — that will lift this economy out of the doldrums.
It was somewhat of a relief this week when the Commerce Department reported that exports grew more than expected in July — further signaling that the U.S. Might not slip back into a recession after all. American goods and services sold to foreigners increased by 1.8% to $153.3 billion, a two-year high that helped shrink the U.S. Trade deficit.
Exports have generally expanded for more than a year. Economists predict they will at least hold steady, if not grow, through the end of this year.
But don’t count on exports to drive U.S. Growth.
Exports account for roughly 12% of the U.S. Economy. This is sizable. It’s also more than double what it was in 1968 when exports made up a mere 5.3% of GDP and much bigger than it was only six years ago when it was 9.5%.
Still, the role of exports isn’t big enough to drive overall growth. For every airplane (which is what mostly drove the rise in July’s exports) or wind turbine America sells abroad, those deals must more than outweigh the goods and services the country buys from foreigners. And, just by looking at America’s ongoing trade deficit, the nation simply buys way more than it sells abroad.
What’s more, consumer spending currently makes up about two-thirds of U.S. GDP. That’s a lot, compared even with other industrialized countries like Japan. And investments, which include companies buying everything from buildings to computers, make up roughly 13% of the economy.
All this means demand at home – not abroad – will mostly drive today’s economic recovery and overall U.S. Growth.
“Exports are a nice thing, but not large enough to drive the US economy,” says David Backus, economics professor at New York University’s Stern Business School.
This isn’t to downplay the role of exports in the U.S. Economy.
The White House earlier this year set a new goal to double exports over the next five years. President Obama sees exports playing an important role in the economic recovery, with the re-creation of a presidential Export Council made up of some of the country’s top chief executives, including Boeing (BA) chief Jim McNerney, the council’s chair, and Xerox Corporation (XRX) CEO Ursula Burns, the council’s vice chair.
And policy analysts at Brookings Institution say that “export growth can make this recovery job-filled rather than jobless.” While the U.S. Has for years generally run deep trade deficits, the Washington DC-based think tank notes that the country actually ran a trade surplus of $152.5 billion in 2008 in the smaller segment of selling commercial services abroad. This includes management and consulting, film and television, as well as computer services and insurance.
Such exports are bound to grow further, as existing and new services emerge and become increasingly traded. For instance, think of America’s sophisticated medical services industry and its allure in certain developing countries where incomes have risen considerably.
But services are just what the U.S. Economy mostly centers around. And the bulk of international trade, at least today and the near future, is focused on manufacturing. No doubt U.S. Factories have become an unlikely bright spot amid the slow economic recovery, but that’s probably just cyclical (factories are restocking inventory after not having done so as much during the recession) and manufacturing still only makes up a tiny part of the nation’s economy as it continues to decline. Manufacturing’s share of GDP topped out at nearly 30% in the 1950s. It is just 11% today.
And only 1% of U.S. Companies even export at all. Brookings urges the need to do more to help firms, especially small ones, enter foreign markets. It also recommends including state and local leaders into the president’s export council and improving the country’s aging and inefficient freight system, among other things.
These are fine recommendations. Anything to encourage overseas sales could help create jobs and reduce America’s trade deficit. But it won’t move GDP enough to drive growth.
