A Cliffhanger for US Trade

Mario O. MorenoGet ready for another year of modest growth for U.S. containerized imports. Surprised? You shouldn’t be. A year ago, I predicted overall imports would grow 2.8 percent in 2012; through September, imports were up 3.3 percent, and I’m forecasting full-year 2012 growth in the 3.0 to 3.5 percent range.

As expected, unemployment was stubbornly high through much of 2012, but is decreasing slowly, with non-farm payrolls averaging gains of 150,000-plus a month. Consumers were cautious with their spending while looking to rebuild their balance sheets. Motor vehicle sales boosted demand for automobile parts, while a third round of quantitative easing by the Fed kept mortgage rates at their lowest in three decades. That helped boost sales of existing homes and spurred modest demand for major home goods, the No. 1 containerized import.

So what can we expect in the way of import volumes this year? My outlook is positive but modest, and will depend on several assumptions.

November’s U.S. election initially provided some relief that a greater degree of clarity would return to the economic policy outlook. Now? I’m not so sure. The conditions unfolding point to reduced growth prospects and perhaps another recession, especially if we don’t get the right mix of policy intervention to avoid the so-called fiscal cliff: the simultaneous end of the Bush tax cuts enacted in 2001-03; the elimination of the 2011 federal payroll tax break that increased taxes on workers by 2 percent; the end of certain tax breaks for businesses; and changes in the alternative minimum tax that promise to impose a larger tax burden on lower-income Americans.

At the same time, President Obama’s health care law will need to be funded by increased taxes scheduled to take effect this month, while “debt ceiling” spending cuts will take effect across more than 1,000 government programs, including defense and Medicare.

Lacking a “fix,” this combination of tax increases and spending cuts will pull enough resources out of the economy to cut output growth this year by 3.0 to 4.0 percentage points in the worst case and 0.5 percentage points in the best case. Either way, the consequences for consumer spending and employment are significant and could be devastating for U.S. containerized imports just when it appeared economic conditions were improving.

Even if Republicans and Democrats reach deep compromises that provide for higher taxes and reduced spending on a more gradual trajectory, the massive level of government debt will continue to restrain private sector investment, hiring and, ultimately, output growth.

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Third quarter 2012 U.S. GDP estimates support this position. Although output growth increased by an annualized 2.7 percent during the quarter, the pace of expansion remains below long-term trends and was insufficiently above the previous quarter’s 1.6 percent rate of expansion to support an appreciable upward revision in the forecasts for the fourth quarter of 2012 and 2013.

Liquidity and tight credit conditions no longer can be blamed for the halting recovery. U.S. corporations are sitting on sufficient cash that, if committed to output expansion, would support a far more robust economic growth. Instead, it’s investor uncertainty, caused to a large degree by the U.S. government’s inability to adequately address the nation’s long-term debt, that remains the primary obstacle between a more robust expansion and the current tepid pace of growth.

Add deepening weakness in the United States’ European trading partners, slower growth in Asia and uncertainties regarding the geopolitical environment, especially in the Persian Gulf, and the outcome could not have been any different.

U.S. income growth was slightly better than expected in the third quarter of 2012 and improved over the previous quarter. However, I forecast a 2.2 percent expansion for all of 2012, a milder 1.9 percent increase for 2013 and an accelerated gain of 2.7 percent in 2014. My modest short-term outlook stems primarily from uncertainty surrounding the current U.S. fiscal position, which anecdotal evidence suggests has companies putting off plans to expand output.

Among other drivers, growth in import prices will remain muted even as nominal interest rates are likely to retreat in light of the fiscal contraction. The dollar will instead derive its strength from its safe-haven status as European economies are likely to suffer through more recession this year.

U.S. Containerized ImportsU.S. containerized imports are forecast to increase 2.2 percent in 2013, to 17.8 million TEUs. That would represent an increase of nearly 400,000 TEUs from 2012 but would be shy of 2007 levels by about 500,000 TEUs. For a larger version of the chart, click on the image.

I expect the nascent recovery in housing to stall and auto sales to moderate in line with predictions of worsening unemployment. U.S. debt heightens the risk of a sharp slowdown — and even recession — for early 2013, at least until consumers adjust budgets to the new fiscal realities. Thus, I am cautiously predicting only modest and below-trend GDP growth for 2013 with accelerated growth beginning in mid-2014.

Given these assumptions, my imports forecast for 2013 calls for modest 2.2 percent growth, to a total of 17.8 million 20-foot-equivalent units. At this level, imports will still stay below the 2007 peak by about 500,000 TEUs.

On the U.S. export side, volumes appear to have grown at a slower rate of 1.1 percent in 2012 than my earlier prediction of 3.8 percent. Outbound container trade has been flat to negative in the last four quarters amid slowing economic growth in Europe and Asia. Contracting income growth in Europe pressured import demand across the continent that, through contagion, also dampened demand for U.S. exports in Asia and Latin America. On the upside, it appears Chinese manufacturing activity reached bottom in November after 12 consecutive months of contraction.

U.S. Containerized Exports.U.S. containerized exports are expected to rise 2.9 percent in 2013, to a record 12.4 million TEUs. For a larger version of the chart, click on the image.

So what can we expect for exports this year? In light of expectations of more sluggish global economic growth, particularly in the U.S. and its NAFTA partners, I expect modest expansion in U.S. containerized exports. A slightly better forecast is contingent on the performance of the U.S. dollar in the year ahead. Clouding that outlook are uncertainties about the U.S. fiscal condition and the narrowing differential between Fed policy and monetary policy worldwide. With a third round of quantitative easing going forward and with persisting global economic risks, my outlook is for a marginal appreciation of the dollar in real terms.

My forecast, then, is for a 2.9 percent increase in containerized U.S. exports this year, to a record 12.4 million TEUs.

But there are several downside risks associated with this projection. First is the expectation that European economies will recover toward midyear. Most economists believe in this outcome, but balance sheets among several EU members remain fragile and subject to political pressures. Growth in China appears to be recovering, but a prolonged European recession could put that at risk, too. Large infrastructure projects announced in China, Brazil and elsewhere would support some growth in U.S. shipments, but only if those plans become reality.

Mario O. Moreno is economist for The Journal of Commerce and its PIERS sister company. Contact him at mmoreno@joc.com

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