by Jun Nie and Lisa Taylor, Federal Reserve Bank of Kansas City
Export growth is an important source of aggregate growth in the U.S. economy. Indeed the importance of exports in contributing to U.S. economic growth has risen steadily over the past three decades, with exports nearly doubling as a share of GDP. Export growth has been championed in recent years as a key driver for the country’s ongoing economic recovery.
But exports of goods and services produced in the United States depend crucially on foreign demand. When foreign economic growth is low, foreign demand tends to be weak as people have less income to purchase U.S. goods and services. In this way, lower foreign growth may lead to less growth in U.S. exports.
Recently, some parts of the world, particularly Asia and Europe, have shown signs of slowing growth. The International Monetary Fund has revised downward its growth forecasts for both Asia and Europe for 2013 by about one percentage point each. A question arising from this slowdown overseas is how U.S. exports and overall U.S. real GDP growth will respond. Economists have shown empirically that decreases in aggregate foreign growth tend to coincide with decreases in U.S. export growth, but the disaggregated relationships between distinct foreign regions’ growth and U.S. export growth have not been fully explored.
Using historical data, this article offers a framework for analyzing how U.S. export growth varies with changes in economic growth in different regions of the world. The greatest changes in U.S. export growth are associated with growth changes in Europe, followed by Canada and Asia. Europe is most relevant to U.S. export growth both because of its large size, as measured by its share of global GDP, and because of its large share of total U.S. exports. The analytical framework can also be used to identify the likely implications for future U.S. export growth of changes in foreign regions’ prospective growth. For example, the framework indicates that the recent downward revisions in IMF forecasts for foreign regions—primarily for Europe and Asia—will be associated with a reduction in the contribution of U.S. export growth to overall U.S. real GDP growth by 0.4 percentage point over the two-year period from 2013 to 2014.
Section I presents key facts about U.S. exports over the past three decades. Section II quantifies the static relationship between U.S. export growth and foreign economic growth using regression models. Section III complements the previous section by providing a dynamic analysis of the relationship between U.S. export growth and foreign growth. Section IV illustrates how the preceding sections’ findings can be applied to understand changes in recent U.S. export growth and to quantify the expected reduction in U.S. export growth related to the near-term slowdown in foreign growth.
I. AN OVERVIEW OF U.S. EXPORTS
U.S. exports of goods and services have grown tremendously during the past three decades, with the level of real exports increasing fivefold from 1985 to 2012. This growth in U.S. exports and its relationship to economic growth in the rest of the world depends on the composition of U.S. exports, the major trading partners of the United States, and the variation in U.S. exports by destination and over time.
The United States exports both goods and services to countries throughout the world, with goods accounting for the majority of total U.S. exports. Chart 1 shows that the share of overall U.S. exports accounted for by goods as opposed to services has been relatively stable over the past 27 years, standing at about 74 percent in 1985 and declining only slightly to 70 percent by 2011.[1] Due to data limitations, and because the export shares of goods and services have been quite stable, the analysis throughout this article will use shares of U.S. export goods by destination as a proxy for the shares of total U.S. exports to each region.[2]
The bulk of U.S. export goods historically has been destined for developed countries, but the share of goods exported to developing countries has increased considerably since the 1980s (Chart 2).[3] In 1985, the share of goods exported to developing countries was only about 29 percent. This share increased to 38 percent in 2007 and rose further to almost 45 percent in 2011. The share of exports to Mexico, for example, increased by 7 percentage points over this period, while the combined share of exports to Canada and Europe decreased by a similar amount (Chart 3).[4]
The United States has four large export markets—Asia, Europe, Canada, and Mexico—and an increase in the share of U.S. export goods to any given region usually is associated with an increase in the real GDP growth rate in that region.[5] From 1985 to 2011, for example, a declining share of U.S. export goods to Canada was associated with slower real GDP growth in Canada. Similarly, from 1985 to 2011, the share of U.S. export goods to developing countries correlated positively with real GDP growth in those countries.[6] Given that total U.S. export goods increased over this period, an increase in the share of U.S. export goods to a given region indicates that the total level of goods exported there also increased. This fact points to a positive relationship between U.S. export growth and foreign economic growth, meaning that as a region’s growth increases, it will tend to purchase more goods from the United States.
