Is a recession brewing? Trade Flows May Help

By March 9, 2008Economy, Trade

The Labor Department reported on Friday that the economy failed to create jobs for a second consecutive month in February. After falling by 22,000 in January, the economy shed a net 63,000 jobs last month. As many newspaper articles have noted, the U.S. economy rarely averts a recession when employment declines at least two consecutive months. So, is Friday’s news the final nail in the coffin for the six-year long expansion. Maybe, but there is still a real possibility that the expansion will instead go through a moment of pause before resuming later in the year.

To be sure, the downside risks to the expansion are substantial. In addition to the housing downturn, high energy prices are eating into real wage growth, consumer confidence is down, stock prices have moderated, corporate profits have slowed, and (now) employment growth has turned negative. While these factors are not in nearly as bad a shape as they were earlier in the decade, together they pose a strong headwind for the economy.

So what is keeping the economy going. Well, an improving trade balance for one thing. During the 2001 recession, the manufacturing sector was much harder hit than the rest of the economy. One of the reasons for this is that export growth plummeted. This was mainly due to the combined effects of an overvalued dollar and stagnant growth abroad (not problems from U.S. trade policy as free-trade foes would have you believe).

Since then, conditions have improved significantly on the trade front. The dollar has fallen about 23 percent and now stands at its 1996 level. At the same time, economic growth abroad has picked up, not just in Asia, but in Europe and Americans as well. Back in 2002, when the dollar was at its most-recent peak, economic growth of our 30-largest export markets averaged just 1.1 percent. By the end of 2007, this pace increased to 3.7 percent.

In the past two years, U.S. export growth alone has added more to the nation’s economy (GDP) than residential investment (housing) has taken away. With effects from the housing downturn spilling over into other parts of the economy, whether or not the economy enters recession will be largely determined by whether or not the improvements in trade can offset these spillover effects.

That being said, it is downright curious why some of the candidates for President of the United States are trash talking trade — Free Trade Agreements like NAFTA to be exact. Not only is blaming current economic troubles on trade blatantly inaccurate, categorizing opening up foreign markets for U.S. producers through more Free Trade Agreements as “part of the problem” instead of “part of the solution” shows a fundamental lack of understanding of how our economy works.

Going forward, it will be important to make sure that the next president understands that lowering barriers abroad for U.S. products makes U.S. manufacturers more competitive globally. And increased export growth is one way that our country can weather domestic problems (such as the current housing downturn) without going through a deep recession.

Leave a Reply