News, Trends, & Analysis

Beyond the Bailouts

By Chief Economist Walter Kemmsies and Economist Dan Solomon of Moffatt & Nichol

Given the uncertainties about policymakers’ decisions, it is hard to contemplate the outlook for the U.S. economy and world trade beyond the difficult first half of 2009. Our outlook calls for weak average growth through 2011 as the economy posts a recovery from 2009 through 2010, but enters a second recession in 2011.

However, we believe that after a few years of lean trade growth, the economy will recover and sustain high levels relative to real GDP growth through the end of the next decade. Beyond 2020, we expect trade growth to slow down to a level more in line with GDP growth.

Stabilizing the Economy
As this column is being penned (on December 21, 2008), President-elect Obama is formulating a second stimulus plan, and President Bush has had to endorse the use of the TARP to support domestic U.S. auto producers. In our view, this was necessary because shuttering the industry would have substantially negative effects on the economy. We believe the auto industry needs to be restructured, but the timing and orderliness of the process is more important. And at this time, there is no concrete policy for stabilizing the real estate sector.

The second stimulus plan first seeks to stabilize the economy and secondly support long-term economic growth. A substantial amount of money is expected to be earmarked for transportation infrastructure. This will improve productivity for the transportation industry and therefore support trade growth. It will also help offset general inflationary pressures from the Federal Reserve’s policy of pumping very large amounts of money into the economy to pull it away from deflation.

Weak Near-Term Trade Growth
U.S. trade growth is driven by the demand for imported goods. Historically, consumer spending has supported imported goods volume growth. Given that employment trends are weak, and most households will have to repair the damage to their balance sheets after residential real estate prices and retirement fund balances fell, it seems unlikely that consumer spending, and therefore import demand, will recover very quickly.
As part of the fiscal stimulus package, it is possible that companies will be allowed to accelerate the depreciation of investments made in 2009 on U.S. soil. That would provide impetus for import growth, primarily for capital equipment such as information and communication technology products.

Growth in Asian container volumes is likely to show a modest recovery, driven primarily by continued outsourcing of manufacturing employment, as companies attempt to lower their costs.

Exports are likely to continue to grow faster than imports, but not by a wide margin because other major economies are going through similar, though less severe, problems as the U.S.

When employment begins to rise and house prices show stability, the Federal Reserve will need to start withdrawing the unprecedented amount of money it pumped into the economy to escape deflation. The Fed will do so when inflationary pressures mount following economic recovery.

To some extent, this will depend on whether oil prices — a primary source of inflation — remain stable at levels reflecting supply and demand conditions or continue to be driven by speculative activity.

2012 U.S. Returns to Sustainable Levels of Growth
In our view, it will be 2012 before the U.S. economy returns to sustainable trend levels of growth. By then much of the employment in the non-services sectors will be in construction. The services sector is expected to increase payrolls as demand in that sector rises due to the rising number of baby boom retirees.

We will experience our largest share of U.S. retirees from 2010 to 2020. A recent National Association of Realtors survey indicates that these retirees plan to change homes and drive less. In addition to other ongoing factors, that should support strong import volume growth.

Slower Sustained Growth Beyond 2020
Beyond 2020, there are few reasons to expect trade growth to continue to exceed real GDP growth. As we have mentioned in previous columns, besides the demographic shift, we anticipate that completion of the last major trade agreements (Doha Round of the WTO and Russia gaining WTO membership) and the Panama Canal expansion effects on world trade will have largely played out by the end of the next decade.
We also expect the containerization of trade to have reached its full potential in the next decade. With no further structural change to support high trade level growth beyond 2020, the 2010 to 2020 period may be the last episode of sustained high container volume growth.

In summary, we expect seven fat years to follow the next three relatively lean years of trade growth and beyond that a gradual slowdown to a level in line with U.S. real GDP growth.