End of Trade Gap Forecast by the ‘90s--if Not Sooner
In the wake of the latest U.S. trade deficit figures reported by the Commerce Department, some economists predict what would have seemed unthinkable only recently: that America’s chronic trade imbalance is shrinking so rapidly that it could virtually disappear by next year.
“I think this is a turning point that is going to come as a great surprise,” said Lawrence A. Kudlow, chief economist for Bear, Stearns & Co., a New York investment firm, and a former top official in the Reagan Administration’s Office of Management and Budget.
Many economists are already surprised by the pace of recent progress in reducing the deficit, now running at an annual rate of $142 billion. The majority forecasts that the stubborn trade gap will steadily decline by about $30 billion each year until imports no longer exceed exports in the early 1990s.
But they are avidly studying growing evidence, including new signs last week, that the U.S. economy is undergoing a dramatic shift from one propelled by consumer purchases to one powered by manufacturing--a transformation that promises continued strong export gains in the coming months and further reductions in the deficit.
“I think it will be several years” before U.S. exports finally catch up to imports, said Michael J. Boskin, a Stanford University economics professor and adviser to Republican presidential candidate George Bush. But he added quickly: “I also think people aren’t yet aware of the tremendous turnaround.”
The most recent hint of a swiftly changing trade situation came Tuesday when the Commerce Department reported that the U.S. trade gap for April totaled $9.89 billion, the lowest monthly deficit since December, 1984. Although such trade reports are notorious for bouncing unpredictably from one month to the next, the April statistics may be part of a pattern, economists said.
After years of competitive setbacks, U.S. manufacturers have enjoyed export gains in recent months in the extraordinary range of 30% when compared to the same periods of 1987. Imports, meanwhile--reflecting a lackluster level of overall consumer spending--have grown much more slowly, at about a 10% rate.
Could Vanish
Those who contend that the trade deficit is in the process of being slashed say that if the recent growth rates of exports and imports hold up, the deficit could vanish on a monthly basis before the end of next year.
“I think a zero deficit is conceivable by the second half of 1989 if exports continue to zoom along,” declared Edward Yardeni, director of economics at Prudential-Bache Securities in New York.
Kudlow of Bear, Stearns agreed: “If the trends persist, the deficit might fall faster in the second half of 1989 than anybody thinks possible.”
While the timing is in dispute, the fact that the economy’s personality is changing is not.
After years of competitive setbacks, U.S. manufacturers are enjoying a boom--with the help of a weaker dollar that makes U.S. products cheaper overseas and imports from Japan and Western Europe more expensive in this country.
Meanwhile, consumers appear to be retrenching from their past role in pulling the economy ahead because they are contending with unusually high levels of debt, rising interest rates and lingering financial jitters from last October’s stock market crash.
The economy’s shift was underscored last week by new statistics in addition to the surprisingly low trade deficit.
On Wednesday, the day after the April trade data was released, officials said industrial production jumped 0.4% in May, a further clue to the growing foreign demand for U.S.-made products. On the same day, the government also reported that U.S. retail sales--a clue to the public’s hunger for imports--edged up a lackluster 0.1% during the month.
Potential Problems
Looking at the overall economy, Dale W. Larson, an economist with Bank of America in San Francisco, predicted a gradual decline in the trade deficit until about 1993. “There’s very little on the horizon that would reverse the trend of recent months,” he said.
Certainly, there are potential problems that could slow the pace of reducing the trade deficit. Some experts worry that U.S. industry, currently running at about 83% of its capacity, may be unprepared to handle continued large increases in demand for its products here and abroad. Also, the price advantages arising from the weaker dollar do not apply across the board: U.S. gains at the expense of European and Japanese rivals may be offset in the future by rising competition from other countries in Asia and Latin America.
“My next TV set is going to be Korean, not Japanese,” said Donald H. Straszheim, chief economist at the Merrill Lynch, Pierce, Fenner & Smith investment firm in New York. “People will import whatever it is they want from the lowest-cost producer, and that’s not always going to be the United States.”
Moreover, the role of the dollar remains something of a wild card. Import prices--which, excluding oil, rose about 9% in the last year because of the weaker dollar--may continue to rise. This would push up the U.S. bill for imports, at least in the short run, even if the absolute number of new items entering the country decreases. In addition, some analysts wonder whether the dollar might start to recapture some of its lost value as the U.S. trade picture improves, thereby eroding America’s competitive advantage.
“We’re seeing really terrific progress right now, and I think we’ll continue to see good progress in the future--but it’s not going to continue that rapidly,” Straszheim said.
Some of the experts who are watching this economic shift also wonder whether that other U.S. financial imbalance, the federal budget deficit, will impede future progress in eliminating the trade gap.
Boskin, for example, predicted that the trade deficit will improve at the rate of $25 billion to $30 billion a year for each of the next two years. However, he said, further improvements will depend on shrinking the budget deficit, which continues to draw vast amounts of foreign capital into the United States. “We’re using that money in part to buy foreign goods,” he maintained.
Strengths of Economy
Those who foresee continued swift improvement tend to focus on the strengths of the economy. They point out, for example, that American factories’ current 83% operating rate, while high, still represents unused potential in factories that make electrical machinery, automobiles and other products.
They further suggest that America’s ability to handle growing export demand is far from exhausted and that the nation is gearing up mightily to exploit the new circumstances. The Commerce Department reported earlier this month, for example, that U.S. business executives plan to boost spending for their companies’ plant and equipment by 10.7% this year, and a hefty gain compared to last year’s increase of just 2.4% and a 2% decline of the year before.
“How can you say we’re at capacity when we’ve closed down so many plants?” Kudlow asked. “If business opportunities exist, these plants will reopen.”
Although analysts do not agree on the most meaningful way to gauge the trade deficit, they agree that it has exhibited a marked, if irregular, trend of improvement in recent months, despite some occasional disappointments.
Robert Ortner, undersecretary for economic affairs at the Commerce Department, said the gap, when adjusted for inflation, peaked late in 1986 at an annual rate of $193 billion--almost two years after the dollar began to fall. This year’s $142-billion rate compares to the 1987 deficit of $170 billion.
“World business is beginning to move back toward the United States,” Ortner said in an interview.
Eased Downward
During the second half of 1987, for example, the monthly U.S. trade imbalance averaged $14.3 billion, and since then has eased downward to a monthly average of $11.9 billion.
Ortner predicted that the deficit will disappear in something between three and six years. But Yardeni of Prudential-Bache said the trade deficit may vanish much more quickly and that many analysts are failing to see the significance of the latest data.
“I think they’re underestimating just how dynamic this economy is,” he said.
