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 3rd, 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.