My Focus on Exports Not Employment

The monthly jobs report came out and is viewed as slightly better than expected but provides both sides of the political debate sufficient fodder to spin it to their advantage.

While equity markets want to put a happy face on the report (an increase in non-farm payroll of 163,000 jobs along with an uptick in the unemployment rate to 8.3%), I have little real confidence in the report signaling meaningful improvement in our economy.

Why am I concerned that our economy is poised to slow and potentially contract? Forget the employment report, let's look elsewhere to get a better read on economic growth going into year end. 

As reported the other day by the Institute of Supply Management, net exports have fallen off a cliff over the last two months. That development is so troubling because prior to the last two months our net exports had grown for 35 straight months. Let's take a harder look at the ISM report,

ISM's New Export Orders Index registered 46.5 percent in July, which is 1 percentage point lower than the 47.5 percent reported in June, and represents the second month of contraction in the index since June 2009, when the index registered 49.5 percent. Prior to this current two-month period of contraction, the New Export Orders Index had registered 50 percent or above for the past 35 consecutive months.

New Export Orders	% Reporting	% Higher	% Same	% Lower	Net	Index
Jul 2012	77	10	73	17	-7	46.5
Jun 2012	78	15	65	20	-5	47.5
May 2012	80	17	73	10	+7	53.5
Apr 2012	79	26	66	8	+18	59.0

Some in the audience may say that I am overly emphasizing the impact of exports on our economy as it has historically represented not even 15% of real GDP.  Well, perhaps we should put a discount into some of those historical models.

Let's review an essay released recently by an economist and analyst at the St. Louis Federal Reserve aptly entitled, Get By With a Little Help From My  . . . Other Exports,

During the 2007-09 recession, the decline in exports did not affect GDP growth as severely as declining consumption and investment, but the recovery scenario has been quite different: Exports accounted for almost half of the average GDP growth in 2010-11, a much larger fraction than during the pre-crisis period.

Moreover, while many analysts are focused on developments in the EU, the authors highlight that in terms of exports, our economy is increasingly more impacted by the slowing in emerging economies.

Here are two great BEA produced bar graphs highlighting these two key points:

Contribution of Components to the U.S. Real GDP Growth Rate

U.S. Exports Share in 2000 and 2011 by Destination

With the global economic engine centered increasingly within the emerging economies, when they slow down — as they are — our economy follows.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.