The rush of consumer traffic at America’s most popular stores in the weeks before Christmas is usually preceded by heavy traffic at American ports. But not this year.
As The Wall Street Journal‘s Robbie Whelan points out in a report on Sunday, imports fell by 10% between August and October at the country’s three biggest seaports—Los Angeles, Long Beach, and New York harbor—during a period known as “peak shipping season,” when American retailers are preparing inventories for the holiday rush. Writes Whelan:
Some of the country’s biggest trucking companies and railroads have recently reported weaker-than-expected earnings. Many have cut the rates they charge customers as demand sagged during what is usually their strongest months. For trucking companies in particular the turnabout has been abrupt, with some companies pivoting from expressing concerns about tight capacity to worries about future profits in the space of a few weeks.
How can we reconcile these data, which show weak demand for imports and for the services that ship goods around the United States, with the conventional wisdom that the U.S. economy is improving enough that the Federal Reserve can raise interest rates next month?
For one, extenuating circumstances can explain what’s going on at American ports. Ports on the West Coast recently suffered through a months-long labor dispute that has made trade data coming out of L.A. and Long Beach difficult to analyze. Last October, merchants rushed orders before the strike to make sure they had inventory on hand for the 2014 holiday season. That artificially inflated imports last year and has exacerbated the year-over-year decline.
Also, the data used in the WSJ story paints a more dire picture than necessary. If you look at August import numbers, the ports of Los Angeles and Long Beach reached all-time highs. So there’s reason to believe that some of the 10% decline we’ve seen in recent months is just compensation for an usually busy August.
Finally, we should hesitate to draw too many conclusions about the health of the U.S. economy based on international trade figures and the demand for manufactured goods domestically. For the past 20 years, as the global economy has become increasingly integrated, we have watched global trade grow even faster than global GDP.
But as Neil Dutta, head of U.S. economics with Renaissance Macro Research, explained to me, that trend has not held for several years. “There is no law that says trade must grow at a rate faster than global growth.” He argues that the explosion in global trade that we saw in the 1990s and 2000s was the result of one-time policy changes, like China joining the WTO. Since about 2007, however, there has been a sharp decline in what what economists call “trade elasticity,” or the amount of global trade for every unit manufactured.
Trade elasticity is declining for several reasons: labor costs matter less as automation has increased, while China and other emerging markets have tried to balance their economies away from an investment-and-export led growth model to one driven more by domestic consumer demand. These trends mean economies will be taking care of their needs on their own and relying less on trade partners. And this is not necessarily a bad thing. A global economy that is less dependent on Americans importing stuff and the Chinese exporting stuff should be more stable in the long run.
That doesn’t mean we should discount the weak data we’re seeing from domestic freight services. Despite falling unemployment, consumer demand for manufactured goods has been weak. We see this in lackluster retail sales numbers, as well as the ISM manufacturing and employment indices. On the other hand, the U.S. services sector has been quite strong.
The above chart shows both the manufacturing and non-manufacturing indices from the Institute for Supply Management. A reading below 50 suggests a contraction in a sector. As you can see, the U.S. manufacturing sector has been hovering near a contraction point all year, while the services sector has been performing better than any time since the recession.
But for the U.S. economy, it’s the services sector—which is about five-and-a-half times bigger than the manufacturing sector—that really drives growth. The U.S. is also a relatively closed economy, with trade accounting for just about 13% of GDP, far less than other developed nations. So, while the global manufacturing sector and global trade is weak, the U.S. services sector is booming. And that’s why most economists, including those at the Federal Reserve, think the U.S. economy is going to be just fine.
