How the US Economy Has Been Affected by a Weakening Yuan
Earlier this week we blogged about how the most important stat in the monthly employment report, aggregate hours worked, has been trending downward thanks in large part to a weaker currency out of China. Aggregate hours worked has fallen from a 3% year-over-year growth rate to just a little over 1% year-over-year. At the same time, the yuan has weakened from about 6.20 per USD to about 6.70 per USD. Unfortunately for the US, a weaker currency out of the second largest economy in the world is having a ripple effect that is being felt in more areas of the US economy than just the labor market.
Let’s begin with trade. US import prices, excluding petroleum, have fallen by about 3.5% over the past three years. This means that on the margin foreign goods have been cheaper for the US consumer. Not surprisingly then, the US non-oil trade deficit has widened out over the past several years. The one-year moving sum of the non-petroleum goods trade balance has increased from about $450 billion to nearly $680 billion over the past three years. The non-petroleum goods trade deficit as a percentage of GDP stands at 2.2% compared to just 0.6% three years ago. The non-petroleum goods trade deficit is actually back to levels last seen in 2008. We feel that this important fact has gone largely unnoticed because the overall trade deficit hasn’t widened out as much thanks to the lower dollar value of imported oil.
Moving on to investment, we see that US non-residential investment has slowed and is actually contracting on a year-over-year basis. Corporate capex is also declining perhaps due to increased import competition. From 2011-2014, as the yuan strengthened by roughly 10%, US corporate capex grew around 10% per year. Now that the yuan has been declining, US corporate capex is actually contracting to the tune of about 11% on a year-over-yea basis.
In addition to corporations cutting capex spending, US corporate profits have slowed as well. NIPA corporate profits are off 16% from the high made in the fourth quarter of 2014. And it isn’t just profits that have slipped, profit margins have contracted as well. Corporate profit margins have fallen from 10% in 2011 to just under 8% as June 2016.
All of this adds up to slower economic output in aggregate. Both real and nominal US GDP have noticeably slowed. The year-over-year change in nominal GDP has slowed from 5% to about 2.5% while the year-over-year change in real GDP has 3.3% to just 1.2%.
Finally, this leads us to ask a question that has important implications for monetary policy. Have we seen a peak in US wage growth for this cycle? If the economy is slowing due to a currency devaluation by China and this leads to an increase in foreign competition thanks to a cheaper cost basis, than isn’t it possible that wage may have already peaked? This of course matters greatly to the Fed and many other economic commentators since a tighter US labor market is suppose to feed into higher wages which ultimately should drive both economic output and inflation higher. If instead US wages are constrained by foreign competition than perhaps the Fed will have to alter its monetary policy course.