Trade Deficit Shows Need to Improve Exports

The Commerce Department stated on Tuesday that the trade gap increased in September 7.6% to $43.03. It is much larger than the estimated $38.1 billion. It is believed that an improving GDP will lend to improvements in exports but this not what happened. The results may be long-term or short-term but do reflect a need for the U.S. to adjust its policies to return to a higher exportation status unseen since a generation ago. Exportation is a solid reflector on internal capacities of a nation to meet market demands.

Much of the recent decline is associated with global economic factors much outside the control of the U.S. The biggest losses were a 6.5% decline in exports to the European Union, 3.2% to China, and 14.7% to Japan. The losses seem to reflect lower economic activity in all three regions of the globe and may simply be a factor of total consumption.  That doesn’t mean the country can’t improve its export capabilities.

Outside of a slower global economy are two major points that should be considered. 

Dollar Value: The dollar has an impact on the total cost of American made products to foreign buyers. When the dollar is cheaper American products become cheaper as well. Research supports the idea that the deflation of the dollar improves exports (Bahmani-Oskooee & Ardalani, 2006). The opposite is also true; a rise in value of the dollar makes imports cheaper and lends to increased trade deficits. 

Regional Export Specialization:  One of the reasons why I am an advocate of regional hubs is that specialization raises exportation but is not so much as to thwart adjustments into complementary products and services when the market shifts. According to Naude, Bosker, & Matthee (2010) and their analysis of exportation found that specializations increased local economic development.  

The dollar amount is difficult to adjust unless you artificially deflate its value while a global slowdown isn’t something in our control. However, ensuring that a greater allocation of international business is in the hands of American companies and worker pockets is important. This requires a level of hub based development focus to create efficiencies that lower the overall cost of production that make companies more competitive. 

When regional hubs are attracting investments, improving their infrastructure, developing the right skills in the local labor market, and generating market breakthroughs they naturally lower the cost of production and improve market relevance. The dollar may be worth more but the cost of production is lower to thwart its damaging effect. A higher dollar can be used to purchase raw materials and turn them into higher profit exports. 

http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm

Bahmani-Oskooee, M. & Ardalani, Z. (2006). Exchange rate sensitivity of U.S. trade flows: evidence from industry data. Southern Economic Journal, 72 (3).

Naude, W. Bosker, M. & Matthee, M. (2010). Export specialization and local economic growth. World Economy, 33 (4).

Congressional Report Highlights Reduced Deficit With Looming Long-Term Problems

The Federal Deficit shrunk in 2014 by $170 billion according to the Congressional Budget Office. The report also argues that future problems with budgets may occur if federal laws relating to taxes and spending remain unchanged. The next few years look bright for the federal deficit and the labor market which will lose some slack as higher corporate profits push for expansion and the rehiring unemployed workers. The positive news comes with significant long-term risks where proactive solutions are needed.

A 15% increase in spending on Medicaid and a 5% increase in Social Security are putting pressure on the budget. Revenue is expected to increase 6% for individual income tax, 8% for payroll tax and 15% for corporate taxes to help release some that budget pressure. The increased revenue and high costs will have an impact on spending priorities.

Federal deficit held by the public will increase to 74% which is the highest since 1950. Additional debt held by the public will rise in 2018 irritating higher interest payments and other financial obligations. The higher debt will likely force large buyers of government debt to start raising interest rates thereby making the debt more costly and a greater burden to the nation. 

The actual report provides a stronger overview of debt in America and the recent improvements in economic development. Government should seek to find ways to simplify the tax structure and reduce the complexity that hinders investment in the country. Simplicity allows companies to make predictions and calculations further into the future and this has an influence on choices of companies to invest here or somewhere else.

Government spending is also a problem as a number of large programs create legacy costs that are difficult to maneuver around.  Large fixed obligations reduce flexibility.  Adjusting spending to shorter-term commitments and renewing those commitments when necessary helps to create some flexibility in handling debt while not locking down national resources.

Government is expensive and often not up-to-date in its overall operations thereby wasting taxpayer money and resources. Adjusting the system upwards in a way that improves efficiency, lowers fixed costs, improves infrastructure, and enhances the lives of its citizens is beneficial. Such movement requires a new way of thinking about government and its functionality. 

The processes of stagnation and rapid change are just as common in government as they are in business. As costs rise, revenue flat lines and competitors improve all organizations are either forced to change or wither into irrelevancy. Proactive small changes today lead to bigger solutions tomorrow. What happens if public servants focus on effectiveness and efficiency? Effectiveness being successful solutions and efficiency defined as the most cost effective way of operating that solution.

Research has taught us that there are many ways the government can adjust its operations, internal incentives, processes, procedures, revenue and spending activities to create a more effective and cost efficient system. Tradition and resource seeking stakeholders that benefit from large government spending are often the main catalysts behind a failure to change when that change is needed.

In the corporate world, companies that continuously innovate to overcome hurdles are more successful than those who are stuck in tradition or ineffective structures. Proactive management requires taking best practices from both research and governance successes in other parts of the world and incorporating them into the larger American model to push it to a higher level of functioning needed in modern markets. This cannot happen unless open-mindedness and proactive thinking focuses on short and long-term solutions.  Starting to change when revenues are high and balancing the budget with cost reduction can thwart significant problems in the future. As improvement continues additional savings are found and applied to reduce the debt and further improvement in the operational functionality of government entities.

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Report

The Economic Outlook for 2014 to 2024 in 15 Slides from Congressional Budget Office

New Economic Indicators Point to an Improved U.S. Business Climate

The economy is picking up steam with positive markers in trade, manufacturing, consumer confidence and service industry growth. Multiple markers help encourage positive feelings among consumers and investors alike. As the market continues to show positive signs it will naturally influence the available purchasing habits of consumers and opportunities of investors.  Even though the positive signs are only blips on an economic radar they do lean toward potential new growth in the near future.

America is making its way back to global dominance as the trade gap narrows and worldwide demand for American products ticks slightly upward.  It is a small start…but it is a start. According to new numbers from the Trade Department the trade gap shrank 3.6% to $40.4 billion dollars from the prior month of $41.9 billion (1). This small adjustment in the trade gap highlights that there is some potential momentum in the market. 

Exports increased 2.1% to $193.9 billion in March (2).  This is good news for manufacturers and investors who seek to find higher rates of return. A small improvement in export growth indicates that there are opportunities within the market that are not fully realized or explored. Additional investment can help support those numbers to turn investment into profitable output.

Furthermore, information from the Institute for Supply Management also indicates that there is acceleration in manufacturing growth while the Labor Department states that 288,000 nonfarm roll jobs were added last month (3).  As production in manufacturing increases so does the likelihood of greater employment opportunities. 

Exports increased $3.9 billion in capital goods, industrial supplies, and automotive related products. Imports also increased $2.5 billion in consumer goods, capital goods, and foods, feeds and beverages.  The overall trend on the graph leans to the trend that growth in exportation is rising over time even though the individual quarters are bouncing from positive to negative. 

 Consumer confidence rose highly within the first quarter of 2014 sparked by a 6% increase with 44% of Americans feeling positive about putting money in the bank again (4).  The importation of personal products is a direct result of positive impressions in society as consumers make their way to the stores. Consumer confidence is also rising in other places creating an upward push on the demand for products and services. 

When consumer confidence rises people generally feel better about their prospects and are willing to spend more of their hard earned capital. This can create additional support for increases in manufacturing and service industry development. The service industry also saw a few percentage point rise around the first quarter thereby complementing other sectors (5). The countries that capitalize on supplying to the needs of the global market are more likely to see greater rebound. Before one can supply to that market they must understand the global market needs and put that within a progressive framework.

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