LP L FINANCIAL R E S E AR C H

Weekly Economic Commentary

August 20, 2012

Made in the USA

John Canally, CFA
Economist LPL Financial

Highlights
Most of us are aware of the large U.S. trade decit. It is easy to fall into the mindset that nothing is made here anymore. We export more than we import in many areas. These exports tend to be service categories, or what we might call American know-how. Our top service export is business and professional and technical services ($134 billion in 2011).
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The United States has run a trade decit (importing more goods and services from other countries than it exports to other countries) since the mid-1970s. Although the trade decit narrows during recessions imports typically fall faster than exports during a recession the trade gap has increased over time, and currently stands at around 4% of Gross Domestic Product (GDP) [Figure 1]. This large and persistent trade decit acts as a drag on overall GDP growth, as exports boost GDP growth and imports detract from growth. In addition, the trade decit has put downward pressure on the US dollar and has contributed to foreigners owning more than 50% of our Treasury debt. Along with our massive budget decit, the trade decit is one of the major economic challenges facing the United States. The trade decit in particular has fostered the conventional wisdom repeated often by many market observers and members of the nancial media: we dont make anything in this country anymore, or everything I buy or own is made in China. In this weeks Weekly Economic Commentary, we examine the drivers of our trade decit and focus on the details of what we import and export.

Inside Look at U.S. Trade Decit

1 The United States Has Run a Trade Decit Every Year Since the Mid-1970s
Trade Deficit (Goods and Services) % of GDP 2 0 -2 -4 -6 60 65 70 75 80 85 90 95 00 05 10 Source: Haver Analytics 08/17/12 (Shaded areas indicate recession) *Import and export data on both goods and service are available monthly, but for ease of comparison we will limit our discussion to the annual data for 2011.

The trade decit is computed by adding up the value of all the goods and services made in the United States and shipped to other countries, and subtracting the value of all the goods and services that were imported from other countries. Our large decit on the goods side (around $740 billion in 2011) more than offsets the trade surplus (around $180 billion in 2011) we have on the service side of the ledger. Combined, our goods and services trade decit was $560 billion in 2011. The composition of the decit on the goods side (what we import) contributes to the notion that we dont make anything in the U.S. anymore, while the hidden surplus on the service side gets little attention. (See Figure 3 for the top-10 categories of exported and imported goods and services). In 2011, the last full year of data available, the United States exported nearly $1.5 trillion worth of goods overseas, but imported $2.2 trillion worth of goods.* The result was a goods trade decit of more than $700 billion. We exported over $600 billion of services, while importing around $425 billion on the service side, for a trade surplus on services of nearly $180 billion.

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Transportation Equipment Tops U.S. Goods Exports

A few items stand out on the two top-10 lists of goods exports and imports. On the export side, transportation equipment (cars, trucks, aircraft, and parts for those categories) is our largest goods export, but we still import more ($267 billion) than we export ($200 billion) thanks to the close proximity of the vehicle production facilities in Canada and Mexico and our appetite for foreign vehicles. Exports of petroleum and coal as well as our exports of agricultural products help to support hundreds of thousands, if not millions of jobs in these sectors of the economy. One interesting category on the export side is scrap and waste. Our exports tend to be high-end, high-value exports. Apparently, our exports are so high-end that we send $39.1 billion worth of waste and scrap overseas from our manufacturing processes. Of course, some of the scrap and waste is consumer-generated recycled materials.

Our exports are so high-end that we send $39.1 billion worth of waste and scrap overseas.

Consumer and Consumer-Related Items Dominate U.S. Goods Imports

The list of our top-10 imported items is full of consumer and consumer-related items like apparel, computers and electronic equipment, transportation equipment, oil and gas, petroleum and coal, and the somewhat deceiving miscellaneous manufactured goods category. This category of imported goods which includes everyday household items like jewelry, sporting goods, toys and games, ofce supplies, etc., is commonplace in the grocery stores and big box discount stores we shop in every day. We imported $104 billion of these goods in 2011 and exported just $43 billion. Although this category is not the main driver of our overall trade decit, it is certainly one of the most visible manifestations of it, and contributes to the overall perception that we dont make anything here anymore.

Although much is made of the maligned hamburger ipper service job, many U.S. service-related jobs require advanced degrees and advanced skills, and help to make possible our booming business.

U.S. Service Exports Are Growing Rapidly

What is not as visible to most Americans (and to most pundits and media outlets) is that the United States is a net exporter of services, and that our service exports are growing rapidly, as consumers and businesses around the world demand Americas intellectual property and expertise and culture too. Service exports were at an all-time high in 2011, and have more than doubled in the past 10 years. Eighty percent of U.S. jobs are service-related, and although much is made of the maligned hamburger ipper service job, many U.S. service-related jobs require advanced degrees and advanced skills, and help to make possible our booming business in service exports.

Good Old American Know-How in Demand

Our top service export, at $134 billion in 2011, business and professional and technical services, is a fancy name for good old American know-how. When looking at goods and service exports together, this would be our fthlargest export. It includes elds ranging from education, oil eld services,

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LPL Financial Research Weekly Calendar

U.S. Data
2012 20 Aug 21 Aug 22 Aug

Fed

Global Notables

Lockhart * Existing Home Sales (Jul)

FOMC Minutes

China: HSBC Flash PMI (Aug) Germany: Bond Auction

23 Aug

Initial Claims (8/18) New Home Sales (Jul)

Eurozone: Consumer Confidence (Aug) Eurozone: PMI (Aug) Germany: PMI (Aug) France: PMI (Aug) Germany: GDP (Q2) U.K.: GDP (Q2) Europe: Merkel meets Greek PM Spain: Spanish Cabinet Meets To Discuss Bank Bailout

24 Aug

Durable Goods Orders (Jul)

Hawks: Fed ofcials who favor the low ination side of the Feds dual mandate of low ination and full employment Doves: Fed ofcials who favor the full employment side of the Feds dual mandate * Voting members of the Federal Open Market Committee (FOMC)

Professional and Business Services Jobs Are at an All-Time High, Driven by Booming Exports of These Services
All Employees: Professional & Business Services Seasonally Adjusted, Millions

and entertainment, to advertising, computer and data processing services, database and other information services, as well as research, development, and testing services*. This category of exports is basically invisible to average Americans unless they (or someone they know) work in these elds. Around 18 million Americans (16% of overall employment in the United States) are employed in this category of service exports, and unlike most other measures of employment, this category has completely recovered from the Great Recession. Of course, not all of those 18 million jobs are tied to exports, but a sizable portion is.

18.75 18.00 17.25 16.50 15.75 15.00 14.25 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Exporting Hollywood
Another service export category that stands out is royalties, license fees, copyrights, and broadcast rights, where we exported $77 billion in 2011. This includes fees earned by U.S. television networks and movie studios selling licenses to foreign media outlets for overseas broadcasts of TV shows like CSI, Family Guy, Jersey Shore, and the Super Bowl, and movies like The Avengers and Spiderman. It also includes U.S. rms like Microsoft, Apple, Oracle, and Cisco licensing their software for use overseas. Similarly, U.S. companies garner $44 billion in fees by selling their patented manufacturing processes to overseas rms. Financial services (investment banking, advisory fees, trading, trust, custody, etc.) provided by Wall Street

Source: Bureau of Labor Statistics, Haver Analytics 08/17/12 (Shaded areas indicate recession)

*These services also include management consulting and public relations, legal, construction, engineering, architectural, mining, industrial services, installation, maintenance, equipment repair, and other services (including medical services).

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Our fastest-growing exports (services) arent always as visible as some of the items we import and consume every day.

investment banks and other large commercial banks netted $74 billion in fees. Education exports basically foreign students coming to the United States to study generated $23 billion in 2011. Foreigners who visited the United States in 2011 spent a whopping $116 billion on hotels, rental cars, and other goods and services while they were here. Looking at combined goods and services export categories, travel would rank sixth. With the exception of insurance services and freight and port services, the United States enjoys a trade surplus in every major category of services. Most major service export categories have experienced near 10% growth per year over the past 10 years, driven higher by fast-growing emerging market economies eager to consume good old American know-how, along with American culture (TV, movies, Times Square, Hollywood, and Disney World), and expertise ranging from accounting to software and, of course, our world-renowned colleges and universities. In short, the United States

2011 Top Ten Exports & Imports

Imports Billions $200.7 $187.7 $143.0 $123.5 $100.3 $69.5 $65.3 $39.1 $36.7 $34.1 $1095.0 $1480.6 $134 $116 $77 Goods Category Computers and electronic products Oil and gas Transportation equipment Chemicals Machinery except electrical Petroleum and coal Misc. manufactured goods Primary metals Apparel and accessories Fabricated metals Total Manufactured Goods Imports All Goods Imports Business and professional and technical services Travel (what US visitors spend when travelling abroad) Insurance Freight and port services $74 $44 $43 $37 $23 $15 $13 Services Passenger fares Industrial processes Financial services Royalties, license fees, and other fees associated with copyrights, trademarks, franchises, rights to broadcast live events, software licensing Telecom Education Billions $342.6 $279.8 $267.9 $216.0 $133.8 $141.2 $104.2 $103.0 $82.1 $53.5 $1,767.6 $2,187.0 $105 $79 $57 $55 $31 $23 $16 $14

Exports Category Transportation equipment Chemicals Machinery (excluding electrical) Computers and electronic products Petroleum and coal Goods Services Agricultural products Primary metals Scrap and waste Fabricated metals Electrical equipment, appliances and components Total Manufactured Goods Exports All Goods Exports Business and professional and technical services Travel (what foreign visitors spend in the United States) Royalties, license fees, and other fees associated with copyrights, trademarks, franchises, rights to broadcast live events, software licensing Financial services Industrial processes Freight and port services Passenger fares Education Insurance Telecom

$8 $6

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is still one of the worlds largest exporters of goods and services, and our fastest-growing exports (services) arent always as visible as some of the items we import and consume every day.

LPL Financial Research 2012 Forecasts

GDP 2%* Federal Funds Rate 0%^ Private Payrolls +200K/mo.

Please see our 2012 Outlook for more details on LPL Financial Research forecasts.

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specic advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your nancial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. * Gross Domestic Product (GDP) is the monetary value of all the nished goods and services produced within a country's borders in a specic time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a dened territory. ^ Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Private Sector the total nonfarm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the rst Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesnt include: - general government employees - private household employees - employees of nonprot organizations that provide assistance to individuals - farm employees The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. International investing involves special risks, such as currency uctuation and political instability, and may not be suitable for all investors. Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on ve major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. LPL Financial is not afliated with any company noted herein. These mentions are for informational purposes only, and in no way reect our view or endorsement of their products or services. This article is not an offer to buy or sell their products or services.

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