Although U.S. income growth in the first three quarters of 2014 was only marginally better than the same period a year earlier, it was sufficient to provide the U.S. unemployed with much-needed relief. The U.S. unemployment rate has been on a steadily downward trajectory over the past year, hitting just 5.9 percent in October. With hiring picking up momentum, consumer confidence in the U.S. has been moderately positive with the expectations component showing clear signs of improvement.
Combined with improved U.S. aggregate income growth, personal consumption expenditures in the U.S. should be rising, but this hasn’t been the case in the aggregate. One reason is that, despite positive jobs growth for the year, the jobs have been concentrated in low-wage occupations. Moreover, wage growth for low- and middle-income occupations have been stagnant.
A more robust economic recovery would show real personal consumption expenditures rising more rapidly than GDP as pent-up demand is released. This is borne out in some commodity categories, but these haven’t translated into improved containerized trade growth. While clothing and footwear spending was virtually flat — a development mirrored by U.S. containerized apparel imports — spending on home furnishings increased 1.2 percent per quarter on average. This contrasts starkly with the weakness found in this trade, suggesting U.S. consumers are spending less on this commodity abroad and more from domestic or near-sourcing areas such as Canada and Mexico.
The same logic may apply to real expenditures on games, toys and hobbies. Spending in this group increased an average of 2.5 percent per quarter, but inbound containerized trade for toys was abysmal over the same period.
Meanwhile, U.S. GDP expanded at a 3.5 percent seasonally adjusted annual rate in the third quarter of 2014, and import prices excluding fuel declined 0.3 percent thanks to the stronger U.S. dollar and weakness in pricing power for Asian and European producers. U.S. GDP will expand at a 2.2 to 3.0 percent pace over the next nine quarters, with labor market conditions tightening.
I believe stagnant wage growth has begun to subside, with third-quarter 2014 data showing a 2.2 percent increase in average wages, the best performance since early 2011. Further evidence of this is the rising quit rates — U.S. workers are voluntarily leaving their jobs at rates approaching 2006 levels, likely because of improved wage offers at other companies. Such an improvement in worker salaries will support an increase in personal consumption expenditures.
We also witnessed a near collapse of oil prices toward the end of the third quarter, which should have a positive impact on consumption for the near term. Falling global oil prices also should keep the U.S. trade deficit from falling too far and therefore provide additional strength to the dollar.
Therefore, I am projecting growth of 6.8 percent in U.S. containerized imports this year, to 20.3 million 20-foot-equivalent units, following an expansion of 6.0 percent in 2014. The downside risks to the forecast remain geopolitical, but the severe congestion at West Coast ports, and a potential overreaction in U.S. equity markets to the inevitable rise in interest rates also bear watching.
U.S. exporters, meanwhile, have contended with weakening external markets and declining favorability of real exchange rates for much of the past year. Global economic growth has slowed as officials in China, Europe and Japan failed to adequately address their fiscal issues. The Russian economy, burdened by plunging oil prices and sanctions over its military action in Ukraine, barely budged in 2014.
In Brazil, where high interest rates and high inflation have plagued economic performance, third-quarter growth will amount to just 0.25 percent. Still, that’s better than the recession the country suffered in the first half of the year.
India’s economy has offered some relief, with fiscal 2014 growth reaching 4.5 percent, but the country is too small in relative terms to have more than a minimal impact.
As for the U.S. dollar, the real exchange rate has formed another significant barrier for U.S. exporters. As nominal rates of exchange continue to favor the dollar over other major currencies, reduced economic growth in most of the rest of the world has pushed external price growth down relative to domestic prices. Thus, in real terms the U.S. dollar has favored imports over exports, and this trend is likely to continue through 2015.
Partially as a consequence of less favorable exchange rates, export prices have been rising steadily since early 2010, an average of 0.5 percent per quarter. Part of this can be attributed to supply challenges in the U.S. for key agricultural commodities, but the rising value of the dollar also is responsible for a large proportion of the increase.
Global economic conditions have deteriorated despite the improving performance of the U.S. economy. Conditions are such that the International Monetary Fund has downgraded its projection for global growth with a particular eye toward the flagging performance of the Chinese and European economies.
And, after a brief surge in growth during last year’s second quarter, conditions in Japan have again worsened enough for authorities there to consider easing monetary policy. Chinese monetary authorities are following suit, though the extent of easing isn’t clear. In Europe, the hawkish European Central Bank is reluctant to ease, though it’s inevitable that at least a symbolic move must occur.
In the meantime, plunging global energy prices could offer relief to consumers worldwide, but the psychological impact of falling prices in this sector actually may be negative because of the deflationary fears they’re stoking. Further, in Russia and other oil-dependent economies, the dramatic decline in prices already has slashed investment outlooks, which will in turn reduce hiring and expansion of the labor market.
None of these conditions are good for export-favorable exchange rates. Global investors are looking to the U.S. dollar for safe haven, which is putting upward pressure on the exchange rate, while relative prices favor U.S. imports over exports.
I expect these conditions to prevail for most of 2015, and my forecast for outbound container trade reflects a negative sentiment as a result. U.S. shipments of containerized goods will slip 0.1 percent in 2015, to 12.0 million TEUs, after a 2.0 percent decline in 2014. I anticipate modest growth to return in 2016 once the global economy responds to looser monetary policy in Europe and Asia.
Downside risks to the forecast include an even sharper appreciation of the U.S. dollar that could result from an intensification of current global conflicts. In particular, I am concerned about ongoing turmoil in the Middle East and am watching for the conflict to widen. In eastern Europe, the Ukraine crisis threatens European economic growth and could impact the U.S. exchange rate. Finally, I am concerned that global monetary easing may not be sufficient to ward off what may become a global recession.
Although the odds of such an occurrence are slim, it remains a possibility, in which case U.S. exports will plunge 5 to 10 percent below my current projection.
Mario Moreno is the economist for JOC Group Inc. Contact him at mmoreno@joc.com.