The Key to America's Growth: INTERNATIONAL SALES

USA Today (Society for the Advancement of Education), March, 1999 by Lawrence S. Davidson

Every two years, the U.S. Department of Labor issues a new 10-year forecast of the economy. The latest one, published in the Monthly Labor Review in November, 1997, forecast major macroeconomic indicators for the years 1996-2006. If these forecasts are correct, we may want to revise the way we think about the world's largest economy, which is becoming much more international and thus affecting business and policy.

U.S. output, as measured by 1992 dollars, is expected to grow more slowly than in the past 10 years--at an annual rate of 2.1%, compared to 2.3% per year from 1986 to 1996. Whether the truth turns out to be 2.1 or 2.3%, the economy is not exactly destined to grow rapidly. To understand better the nature and impacts of economic growth, it is necessary to take a closer look at the components. The U.S. economy is growing slowly, and much of that growth is being propelled by international sales.

First, consider the dollar amounts that Americans spend on various goods and services. That the U.S. is a service-oriented nation is confirmed by the fact that almost 40% of what was produced in 1996 was categorized as consumer services (housing, utilities, transportation, medical, etc.). Ten years before that, two trillion dollars were spent on consumer services. The relative importance of consumer services spending in 1986 can be understood better by comparing expenditures on other components of the gross domestic product (GDP). After consumer spending on services, the next larger amounts were 1.2 trillion dollars for consumer nondurables (mostly food and clothing); $455,000,000,000 for residential and nonresidential structures (essentially building and construction); $448,000,000,000 on durable goods (e.g., cars and appliances); $346,000,000,000 for producers' durable equipment; $273,000,000,000 for Federal government defense expenditures; $244,000,000,000 for exports of goods; and $120, 000,000,000 for exports of services.

At $364,000,000,000, exports of merchandise and services clearly were important in 1986, but that amount was small in comparison to other major spending items. For example, sales of exported merchandise amounted to 12% of consumer spending on services. Foreign sales of merchandise added up to just about half of what was spent on durable goods in 1986.

That will have changed, according to the forecasts of the Department of Labor, by 2006. Between 1986 and 2006, GDP is predicted to grow from 5.5 trillion to 8.5 trillion dollars, an increase of three trillion. That means annual output of all goods and services will be 56% higher than it was in 1986. Consumer spending on services is expected to continue to be the nation's largest spending category in 2006.

Exports of merchandise, the sixth largest spending category in 1986, will become the third largest in 2006 because international sales are expected to rise by 438%. In other words, the official forecast has GDP expanding by 56% while the exported part of GDP is supposed to grow by 438%. One may wonder about such a forecast, but much of it has come tree already. As of 1996, merchandise exports reached $609,000,000,000, about double what they were in 1986. If they double again in the next decade, the forecast would be right on the money.

Between 1986 and 2006, GDP will have grown by an annual average rate of about 2.8%. Of all the domestic sources of added spending, just producers' durable equipment really stands out, when measured by growth. The nation's firms are expected to increase their outlays on new machines and equipment by about 170%, or 8.5% per year. The remaining major domestic spending sources are predicted to increase much more slowly. Their growth rates range from three percent per year for consumer spending on services to 0.6% for residential and nonresidential building.

These relatively small annual growth rates pale compared to the expected 22% per year for merchandise exports and the 11% annual growth of services exports. These rates make it abundantly clear why the total of merchandise and services exports will become the second largest U.S. source of spending in 2006, trailing only consumer services. In 2006, the Labor Department expects spending on consumer services to equal 3.2 trillion dollars, while exports of goods and services will measure approximately 1.7 trillion dollars.

If the allocations of GDP can be described by the slices of a pie, then the sizes of these slices will have changed dramatically. In 1986, exports of merchandise and services together accounted for seven percent of GDP. It was one of the narrowest slices. Being the fastest growing spending category for 20 years will increase its share to 20% of GDP in 2006. Foreigners, who once purchased a very small portion of American goods and services, will buy one-fifth of all U.S. production in 2006. The foreign slice of the nation's output will take up a much larger share of the pie.

If a larger percentage of the nation's output is shipped abroad, that means a smaller part of the whole will stay home. Not all goods will be impacted the same. Americans will spend relatively more for domestically produced durable goods in 2006. The share of spending of consumer and industrial durable goods will rise from 16 to 21%. Less of the nation's income will be spent proportionately on nondurable goods, housing, industrial structures, and the several categories of spending that are not defined individually.