Exports Will Lift GDP Growth Again in 2008

Exports are saving the U.S. economy's bacon. Growth in American companies' foreign sales is poised to continue, helped by the weak dollar.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

November 26, 2007

Let's hear it for solid export gains. They're coming into full bloom just as the economic burdens of housing and credit woes plus energy costs are making U.S. consumer and business spending wilt. In fact, exports will keep the economy from looking feeble in 2008. The country's net exports -- that is, the amount of exports minus the amount of imports (the latter subtract from economic growth) -- will account for about half of the 1.5% to 2% growth we expect next year. That contribution will be up from one-quarter of gross domestic product (GDP) in 2007, the first time since 1995 that exports have made a positive contribution to annual GDP.

Thank global growth and the weak dollar for America's latest export surge. The greenback should soon hit its lowest level, on a trade-weighted basis, since the currency began to float freely in the markets in 1973, and the low buck's salutary effect on exports will have a long tail. Even if the dollar were to start rebounding at this point, the lag effect of its six-year swoon would fuel exports for a few years. Why? It takes businesses a long time to adjust to currency changes. Finding new suppliers is easier said than done. That's why the weaker dollar didn't instantly boost sales abroad.

Exports will be a welcome salve to many manufacturing industries, helping to slow the loss of jobs on factory floors. Leading gainers in foreign sales include autos and auto parts, civilian aircraft, chemicals and pharmaceuticals, IT gear and measuring and control equipment.

U.S. companies are latching on to fast growing emerging markets. In the year through September 2007, exports to China were up 16% from the same period in 2006. Timken Co. of Canton, Ohio, is selling oodles of its specialty steel in the Middle Kingdom. China also buys huge volumes of American-grown soybeans and about one-third of the U.S. cotton crop. In addition, sales to China yield indirect benefits for companies that supply the exporters. For example, MTS Systems Corp. of Eden Prairie, Minn., one of the world's leading manufacturers of test equipment, is doing brisk business with U.S. semiconductor makers and others selling to China.

U.S. exports to Brazil are up nearly 30%. John Deere and Caterpillar are cleaning up there with equipment sales to mining and agricultural businesses riding the wave of high-priced commodities. General Electric peddles jet engines and mining equipment to the South American giant, while IBM, Hewlett-Packard, Compaq and Dell all view Brazil as a choice target for their IT hardware sales forces.

Meanwhile, exports to India have gained a whopping 65%. Boeing will be busy for several years fulfilling orders, collectively worth $13 billion, from Air India and Jet Airways. Cisco is overflowing with Indian orders for IT networking gear, while Motorola and Alcatel-Lucent are cashing in on the nation's expanding telecommunications infrastructure. Houston-based Transocean Inc. is selling the country deepwater gas drilling platforms as India tries to keep up with its burgeoning energy needs.

We would be remiss to leave out service exports, which make up about 30% of the total. A big chunk of service exports is actually the tourism balance -- money spent in the U.S. by foreign tourists versus what American tourists spend abroad. The dollar's swoon is a potent lure for world travelers, especially those from Europe and Canada. But the weak buck also leads a lot of U.S. vacationers to postpone trips to strong-currency regions and spend leisure time in their home country instead.

Beyond tourism, a number of U.S. service industries are reaping bigger rewards overseas these days. They include auto, truck, office and other leasing operations, computer and information services, equipment maintenance and repair, architecture, engineering, legal, trade-related tasks, accounting and advertising. Higher education will benefit, too. "Many more foreign students will find it more affordable to study in the U.S.," says Nariman Behravesh, executive vice president and chief economist of consulting firm Global Insight. "Though how many actually come will depend on [the availability of] visas." Many of those students who do come will remain to work, giving U.S. industry the benefit of their scientific and technical expertise.

In the end, a kinder, gentler trade gap is on tap. It'll amount to about 3.8% of GDP in 2008, the smallest share in seven years and down substantially from this year's 5.1%. A shrinking deficit is likely to boost confidence in the longer-term health of the U.S. economy and encourage more foreign investors to park their money here. The trade deficit's meteoric growth in recent years raised questions about whether Americans were simply living beyond their means and heading for a financial crash.

Bottom line: U.S. companies are in fighting trim, and foreigners aren't eating their lunch -- at least, not all of it. American businesses are still well able to muscle aside foreign competitors to maintain a top position on the sales leaderboard.

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