Triple “Ut-Oh”: September Trade Release and the End of the Consumer of Last Resort
Submitted by Econbrowser
Brad Setser says “Ut-Oh”, beating me to the punch on the September trade release, which showed US exports plunging. It’s a post that Paul Krugman rightly expresses some angst upon reading. And now I’m going to add two more reasons to worry (not that I think Setser and Krugman aren’t aware of these points).
First, after reflecting upon the collapse of exports noted by Setser, think “disaggregate”.
Figure 1 depicts exports of capital goods; they declined 10%, exceeding the 8% reported for all goods exports (all calcuations in log terms). That’s 10% for September alone. Since the standard deviation of monthly log changes is 3.1% (2004M02-08M9), well, that’s pretty significant… Why focus on capital goods exports (more so than say ag exports), given their volatility? Because they represent foreign demand for goods that can be used to produce things; as demand for capital goods goes down, so too should one’s inferences about future growth prospects abroad. And that growth abroad (and the associated US exports) has been what’s been keeping the US economy out of recession. Well, as I noted earlier, exports alone have not kept the US economy out of recession in past episodes [1], and this time doesn’t seem like an exception.
Figure 1: Real exports of capital goods (blue), and real imports of consumer goods (red), seasonally adjusted Ch.2000$. Tan shaded area denotes period after 2007M12. Source: BEA/Census, September trade release.Figure 1 also depicts imports of consumer goods. That series declined 8.1% (compared 2.7% for all non-oil imports). What this seems to suggest is that the consumer has “hit a wall” (as if we needed any additional confirmation of that).
In figure 2 I present a more long run view of these two series, using the NIPA series, from the October 30th release (so predating the release of the September trade release — but this won’t affect the picture save for the 2008Q3 observation for consumer goods imports, which will be revised downward). The key point here is the the import series has flattened out in the period before the consumption downturn.
Figure 2: Log real exports of capital goods (blue), and log real imports of consumer goods (red), SAAR Ch.2000$. NBER defined recession dates shaded gray. Tan shaded area denotes period after 2007Q4. Source: BEA, NIPA advance release of 30 October, NBER, and author’s calculations.That consumption downturn is illustrated in Figure 3.
Figure 3: Log real consumption (blue, left scale), log real goods imports ex.-oil (green), and log real consumer goods (red), SAAR Ch.2000$. NBER defined recession dates shaded gray. Tan shaded area denotes period after 2007Q4. Source: BEA, NIPA advance release of 30 October, NBER, and author’s calculations.My interpretation of this figure is that the consumption slowdown [2] [3] signals the end of the role of the US as consumer of last resort.
Lastly, perhaps an obvious point, but it bears restating: as US consumption declines, this will induce a reduction in imports, which will decrease foreign exports and hence foreign income — which then reduces US exports, etc. What’s the implication of this? Let’s use some concrete numbers in a simple two-country Keynesian model (math here). If the marginal propensity to consume out of total income is 0.7, and the marginal propensity to import is 0.3, then the multiplier for an autonomous drop in consumption is 1.67, when there are no repercussion effects. But if the drop in US imports decreases foreign income, then (assuming symmetry for the sake of simplicity), the multiplier is 2.22. The multiplier worked on the way up; it will work on the way down.
Now add that idea to the estimate I presented in this post on the consumption prospects — the implied 2% decline of 164 bn Ch.2000$ (if treated as largely due to wealth effects) will imply a larger decrease in output than implied by .
So, to sum up:
- The sharp and significant decline in exports is worrisome, since exports have been maintaining US GDP growth thus far.
- The sharp and significant decline in capital goods exports is worrisome, because it presages a decline in future output, insofar as expenditures on capital goods are a forward looking indicator of investment prospects.
- The sharp and significant decline in consumer goods imports further substantiates the view that consumption is sharply dropping. Even if the drop is reversed next month, the sustained flattening out of consumption imports (already it looks longer than in the previous two recessions) represents a big departure from the past.
- If the US has truly stopped being the consumer of last resort, then to the extent the impending consumption decline in the US is autonomous (largely unrelated to income), we should expect the repercussions to be widely felt amongst our trading partners.
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