Post Script on the Economy’s Condition

This post is a very short post script to yesterday’s post on the economy’s weakening condition. In that post I noted the current evidence of both the stock markets and economic aggregate data supplied by the Federal Reserve tells us the economy is in a very fragile condition. It would not be surprising if a small economic perturbation caused by some “black swan event” bumped us into recession.  

One of the pieces of evidence from the Federal Reserve that I cited was the precipitous fall of both imports and exports since the middle of 2014, as can be seen in the following graph from the Federal Reserve Economic Database (FRED).

What is displayed in this graph are export and import indices that compare export and import volumes to their volumes in the year 2010. As the graph shows both indices have been dropping precipitously since the middle of 2014 by about 3%. According to the Bureau of Economic Analysis, U.S. exports in the second quarter of 2015 were $385 billion and the imports were $573 billion. Annualized and then divided by a GDP of $17.4 trillion, we get annualized exports of 8.9% of U.S. GDP and annualized imports of 13.2% of GDP.  A fall of 3% in both imports and exports is a very big deal indeed.

Serendipitously, when I started to read the Wall Street Journal this morning, I found the article “U.S, Export Weakness Hampers Growth” that commented on the steep fall of exports and confirmed my observations. The authors Mark Peters and Ben Leubsdorf reported

Hopes for an American export boom are wilting under the weight of a strong dollar and global economic strains.

U.S. exports are on track to decline this year for the first time since the financial crisis, undermining a national push to boost shipments abroad. Through July, exports of goods and services were down 3.5% compared with the same period last year. New data released Tuesday by the Commerce Department showed that exports of U.S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years.

The reasons given for the fall in exports were the weak global economy and the rising value of the dollar. Why then do we have a corresponding and comparable fall in imports? Weak economies with weaker currencies would seem to have a comparative advantage to export their goods to the United States. Then they could replace the fall in their domestic demand with U.S. demand and could earn the stronger U.S. currency. The only reason (at least in the short-term) for a comparable fall in U.S. imports is that the U.S demand for the foreign goods must also be falling. This strongly suggests the U.S. economy is growing weaker in tandem with the global economy.

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