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Durable Goods and the Collapse of Global Trade by Jian Wang

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Durable Goods and the Collapse of Global Trade by Jian Wang vol. 5, no. 2 FeBrUarY 2010­­ EconomicLetter Insights from the F e d e r a l r eserve Bank o F d a l l a s Durable Goods and the Collapse of Global Trade by Jian Wang Due to the financial Global trade has experienced a stunning collapse in the current re- crisis, worldwide cession, with the World Trade organization estimating a decrease of roughly demand for durable 9 percent in 2009—the biggest contraction since the second World War.1 Both goods dropped imports and exports plunged in major trading countries (Chart 1). substantially. The The swift decline caused substantial damage to the global economy, decline inevitably hitting Japan and other countries with large trade sectors especially hard. It caused a plunge in also raised concerns that the trade collapse would worsen the global recession global trade. and delay recovery. several factors contributed to the global trade collapse. However, the ultimate causes are tied to the global financial crisis that started in mid-2007. Financial markets deteriorated over the next year, and the global economy’s growth prospects shifted suddenly in september 2008. In the final months of the year, the forecast for Chart 1 2009 gross domestic product (GDP) growth went from a moderate slow- Import and Export Growth Rates Fall down to a sharp contraction (Chart 2). as Recession Deepens Consumers and investors world- wide started to realize that the financial crisis’ impact on real economies may A. Real Imports B. Real Exports be longer and more severe than they Percent* Percent* had expected. They pulled back signif- 0 0 icantly, leading to declines in total con- sumption and investment that spilled –10 –10 over into global trade. Particularly hard hit were consumer and producer –20 purchases of long-lasting goods. We –20 will see that demand for these durable –30 goods played an important role in the –30 recent global trade collapse. –40 –40 Trade Volatility and GDP –50 The last quarter of 2008 saw GDP –50 2008:Q4 2008:Q4 plunge in much of the world, includ- –60 2009:Q1 2009:Q1 ing key countries such as the U.S., Germany, Japan and the U.K. (Chart –60 –70 U.S. Germany Japan U.K. U.S. Germany Japan U.K. 3). Understanding how such declines *Quarter/quarter, annualized. in economic activity impact interna- SOURCE: Organization for Economic Cooperation and Development. tional trade starts with a look at two persistent patterns in the trade data. First, imports and exports are much more volatile than GDP. Second, they generally move in the same direction as GDP. The upshot is that Chart 2 a steep drop in a country’s GDP usu- 2009 GDP Growth Forecasts Turn Gloomy During 2008 ally results in an even steeper drop in imports and exports. Using the U.S. as an example, we Annual GDP growth (percent) look at annualized quarter-to-quarter 3 changes in imports, exports and GDP Sept. 2008 since 1980. Over this period, both 2 imports and exports show much big- ger variations than GDP (Chart 4). The 1 wide fluctuations obscure the fact that imports and exports are also positively 0 correlated with GDP—particularly in the early 1990s, the first few years of –1 Euro area Japan the 2000s and the most recent period U.S. 2 –2 of economic turmoil. U.K. Trade volatility and a posi- –3 tive comovement with GDP aren’t Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Jan. 2008 2009 limited to U.S. data. Measured by Date of forecast their standard deviations, imports SOURCE: Consensus Economics’ Consensus Forecasts. and exports are about three times as volatile as GDP in most Organization for Economic Cooperation and Development (OECD) countries.3 EconomicLetter 2 Federal reserve Bank oF dallas Federal reserve Bank oF dallas EconomicLetter Imports and exports are also positively correlated with GDP in nearly all of Chart 3 these countries.4 Like the U.S., most industrial coun- Real GDP Declines in Some Major Economies in 2008–09 tries experienced sharp declines in their GDPs in the recent global financial cri- Percent* sis. It’s not surprising that their imports 4 and exports fell even more sharply. 2 The fact that imports and exports have greater volatility than GDP ex- 0 plains why international trade plunges –2 in deep recessions. But why is trade –4 so much more volatile than GDP? The answer is that durable goods make up –6 a large fraction of international trade— –8 and demand for them is usually very –10 2008:Q3 volatile. 2008:Q4 –12 2009:Q1 –14 2009:Q2 Trade in Durable Goods 2009:Q3 Durable consumption goods and –16 Germany Japan U.K. private capital investment factor into U.S. durables trade. Durable goods yield *Quarter/quarter, annualized. service or utility over time. Examples SOURCES: National statistical offices; Organization for Economic Cooperation and Development. include such capital goods as machin- ery and such consumer goods as automobiles, appliances and big-screen TVs. When the economy is expected to turn sour, households can put off pur- Chart 4 chases of consumer durables but can’t U.S. Imports and Exports Vary More than GDP easily delay purchases of food and other goods for quick consumption. When inventories start to grow, firms Percent growth* don’t expand capacity, and they cancel 40 or postpone new investments. Thus, 30 demand is generally much more vola- tile for durable consumer goods and 20 investment than for nondurable goods. 10 Once again, the U.S. provides a good example. We look at annualized, 0 quarter-to-quarter percent changes in the output of both durable goods and –10 nondurable goods and services. The –20 Imports data show that durables are more vola- Exports tile than nondurables (Chart 5). –30 GDP Durable goods represent a mod- –40 erate share of the economy in most 1980 1984 1988 1992 1996 2000 2004 2008 industrial countries—in the U.S., for example, they accounted for 23.6 per- *Quarter/quarter, annualized. cent of real GDP in 2008. However, SOURCE: Organization for Economic Cooperation and Development. durable goods make up a large share of international trade. In the U.S., they accounted for more than 60 percent of trade in goods (excluding energy EconomicLetter Federal reserve Bank oF dallas Federal reserve Bank oF dallas 3 EconomicLetter products) in 2008. The figure is 70 per- Chart 5 cent on average for the OECD coun- tries, according to several studies.5 Growth Rates More Volatile for Durable Due to the global financial cri- than Nondurable Goods in U.S. sis, worldwide demand for durable goods dropped substantially. In the first quarter of 2009, for instance, Percent* demand fell about 20 percent in the 30 U.S, Canada, Japan and the U.K., adding to the weakness of the pre- 20 vious two quarters (Chart 6). The Nondurable 10 decline inevitably caused a plunge in goods global trade. 0 Worse than Before? –10 We know that trade declines faster than GDP in hard times. But –20 Durable goods how do the declines this time compare with those in the previous downturn –30 in 2001? In absolute terms, the fall of U.S. –40 1985 1988 1991 1994 1997 2000 2003 2006 2009 imports and exports has been more severe than it was in the previous *Quarter/quarter, annualized. recession. However, GDP has also SOURCE: Bureau of Economic Analysis. declined much more this time. We need to take this into account in com- paring trade flows in the current and previous recessions. U.S. exports relative to GDP fell about 16 percent from the second Chart 6 quarter of 2008 to the second quarter Demand for Durable Goods Falls Off Globally of 2009—the same as they did from peak to trough in 2000–01. However, Percent* the decline in imports has been much 5 deeper this time. As a share of GDP, they fell 18.3 percent—more than 0 twice as much as they did in the pre- vious downturn. –5 The decline of durable goods contributed heavily to the fall of U.S. exports and imports in both reces- –10 sions, led by big drops in capital goods sales (see red section of bars, –15 Chart 7A). In the current recession, export –20 2008:Q3 2008:Q4 losses have been large in automotive 2009:Q1 vehicles, engines and parts (green); –25 U.S. Canada Japan U.K. the category held up much better in the less-severe downturn in 2001. *Quarter/quarter, annualized. Automobiles and consumer goods NOTE: Canada is used due to insufficient data from Germany. account for a large fraction of the SOURCE: Bureau of Economic Analysis. decline of U.S. imports this time, while capital goods less autos led the fall of imports in 2001 (Chart 7B). EconomicLetter 4 Federal reserve Bank oF dallas Federal reserve Bank oF dallas EconomicLetter These findings are consistent with the observation that U.S. households Chart 7 have substantially cut back durable goods consumption the past two Factors in the Fall of U.S. Real Exports and Imports years—in contrast to the previous recession, when durables purchases A. Capital Goods, Autos Drag Down Exports… increased (Chart 7C). This difference Percentage points* helps explain why U.S. imports have 30 declined much more in the current 20 recession than they did in 2001. 10 Other Mechanisms 0 The complexities of modern inter- –10 Capital goods, except automotives national trade factor into the demand –20 Automotive vehicles, engines and parts Consumer goods, except automotives for goods. Globally intertwined Industrial supplies and materials –30 Foods, feeds and beverages mechanisms such as financial markets, Other trade credit and vertical specializa- –40 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 tion likely exacerbated the plunge in worldwide demand for durable goods B.
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