The Sunshine Report

Gross Domes­tic Product

Two num­bers from this week’s GDP release for Q2 2008 caught my eye, (i) exports were up 9.2% and (ii) imports were down 6.6%.

For sev­eral months I have been dis­cussing improv­ing US global com­pet­i­tive­ness and the sec­ond quar­ter GDP release sup­ports my analysis.

US exports are surg­ing and US firms are com­pet­ing against importers because of large nom­i­nal price swings since the begin­ning of 2007. Below is a very gen­eral exam­ple of how US com­pa­nies are becom­ing a lit­tle more com­pet­i­tive rel­a­tive to Chi­nese exporters.

• Adjust­ment in US dol­lar exchange rates. The dol­lar has lost value rel­a­tive to most cur­ren­cies and in par­tic­u­lar rel­a­tive to the Chi­nese RMB. Since Jan­u­ary 2007, the dol­lar has lost 15% of its value rel­a­tive to the RMB.
• Infla­tion in China, South­east Asia and the rest of the world. US infla­tion is much lower than infla­tion in most of the rest of the world. China infla­tion has aver­aged approx­i­mately 7.5% per annum in 2007 and the first half of 2008. Since Jan­u­ary 2007, cumu­la­tive price infla­tion in China has been approx­i­mately 11.25%.
• Increased cost of trans­porta­tion. Accord­ing to CIBC research, high energy prices are increas­ing the cost of imported goods. As an exam­ple, trans­porta­tion costs rose in 2007 and 2008 and had the eco­nomic effect of approx­i­mately a 9% “tar­iff” on many Chi­nese imported goods. Such arti­fi­cial “tar­iff” is up from approx­i­mately 3% ear­lier in the decade or an increase of 6%.

Since early 2007, many goods that are imported from China have expe­ri­enced price pres­sure in nom­i­nal US dol­lar terms of as much as 32.25%. Of course, the nom­i­nal cost of many US goods has inflated since early 2007, but gen­er­ally not any­where near 32.25%.

As prices for imported goods from China and the rest of the world increase, domes­tic com­pet­i­tive­ness improves. As expected, trade is tip­ping in the direc­tion of US man­u­fac­tur­ing and ser­vice providers. Such tip­ping was reflected in the sec­ond quar­ter GDP results.

There are other “indi­ca­tors” of improv­ing US competitiveness.

• US Steel had a record break­ing sec­ond quar­ter (prof­its almost tripled from the first quar­ter). Orders and pric­ing were strong for US Steel and they antic­i­pate great per­for­mance for the rest of 2008. For the first time in 30 years, US Steel is able to deliver its prod­uct at com­pet­i­tive prices rel­a­tive to imported steel and as a result is prof­itably grow­ing mar­ket share.
• On August 3^rd, Bloomberg reported that “[m]anufacturing in China con­tracted for the first time since a sur­vey began in 2005 as export demand fal­tered and fac­to­ries closed to clear the air before the Olympic Games. The Pur­chas­ing Man­agers’ Index fell to a sea­son­ally adjusted 48.4 in July from 52 in June, the China Fed­er­a­tion of Logis­tics and Pur­chas­ing said today in an e-mailed state­ment. The expan­sion of the world’s fourth-biggest econ­omy slowed for the fourth straight quar­ter in the three months through June on weaker U.S. demand. ”
• The New York Times ran an arti­cle in today’s paper titled Ship­ping Costs Start to Crimp Glob­al­iza­tion. In the arti­cle, the New York Times reported on the “neigh­bor­hood effect” of high ship­ping costs. Such effect favors local sup­pli­ers for a wide range of prod­ucts. As a result, The New York Times reported that cer­tain domes­tic man­u­fac­tur­ers can com­pete against Asian imports.

At a time when I have trou­ble find­ing good things to write about, the surge in US com­pet­i­tive­ness is a wel­come growth oppor­tu­nity and a rea­son for optimism.