Export-led growth disguises recession on domestic front

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By Patrice Hill THE WASHINGTON TIMES

It's a tale of two economies — one propelled by robust growth in exports tied to strongly emerging markets overseas, the other mired in recession as consumers at home struggle to cope with record high debts, soaring energy prices and falling home prices.

The divergence could be seen clearly Thursday in a Commerce Department report showing a 1.9 percent spurt in export-led growth in the spring quarter even as many Americans say the economy is in the worst condition in decades and is shaping their attitudes during the campaign season.

The report showed that the domestic economy shrank at a 0.5 percent rate in the last quarter even as a 9.2 percent surge in exports and 6.6 percent drop in imports enabled the overall economy to eke out a gain. Revised data suggested that a recession started at the end of last year when the gross domestic product shrank by 0.2 percent.

"It is a safe bet that the domestic economy has been in recession since the end of last year," said Nariman Behravesh, chief economist at Global Insight. After a one-time boost from tax rebates wanes in the next couple of months, he said, the underlying weakness of the domestic economy likely will lead into the second leg of a "double-dip" recession. "The second dip is imminent," he said.

Consumer spending normally constitutes about 70 percent of U.S. economic growth, so the reliance on exports is unusual. In the past year, however, rapidly emerging economies around the world — including in China, India, Brazil and Russia — have provided a rich market for U.S. exporters, aided by a weaker dollar that makes American goods more affordable to overseas consumers.

Harm Bandholz, an economist with Unicredit Markets, said the U.S. economy was saved from recession in the last quarter by stellar global growth, not the estimated $100 billion of federal tax rebates. Exports, he said, accounted for 84 percent of U.S. economic growth in the past year.

"Despite the sizable fiscal stimulus program, private consumption rose a mere 1.5 percent" in the latest quarter, he said. The gain of 0.9 percent in the first quarter was the smallest in 13 years.

"For the next two or three months, the tax rebates are likely to support consumer spending" in a modest fashion, he said, "but once the impact of the fiscal stimulus fizzles out, the underlying problems of U.S. households will resurface: rising unemployment, falling house prices and high debt burdens. ... We expect consumer spending to rise a mere 0.5 percent in the second half of the year."

A Labor Department report released Thursday highlighted another burden on consumers: A 3.1 percent rise in wages and benefits in the past year was overwhelmed by a 5 percent surge in inflation driven by record increases in oil and gasoline prices.

"The American worker is under siege," said Global Insight's Kenneth Beauchemin. "During the past year, soaring energy and food prices conspired with lackluster compensation growth to produce one of the sharpest declines in inflation-adjusted compensation since 1980. Furthermore, softening labor market conditions do not portend acceleration in wage growth any time soon."

Evidence of a worsening job market emerged with a 44,000 surge in first-time claims for unemployment benefits to 448,000, the highest level in five years. The Labor Department attributed the development to extended unemployment benefits that just became available under a law enacted this spring.

The combination of weak underlying growth in the economy and rising joblessness raised recession fears on Wall Street, driving the Dow Jones Industrial Average down 206 points Thursday.

One of the few places people were celebrating was the National Association of Manufacturers, which has been basking in hot export sales.

"Rising exports are the brightest light for our economy right now," said association economist David Huether.

He noted that the surge in exports in the spring more than canceled out a 16 percent drop in home construction, which has been the biggest source of weakness in the economy.

Mr. Huether said the important role of exports in the past year vindicates the free-trade and open-market policies U.S. officials have pursued for years, sometimes in the face of intense public opposition.

"Our biggest foreign markets are those countries with which we have free-trade agreements," he said. "In fact, so far this year we actually have a surplus in trade of manufactured goods with those countries."