Can the Export Market Save US?

If anyone would have asked me if we could have "devalued" ourselves out of our US-led financial mess, what with the irrational exuberance of the 90s and the warmongering of the 00s, I would have said, "No Way!" But we may have done so, albeit it at a cost, i.e. an increasingly stressed working poor and middle class.

Paul Krugman opened his blog this year by unveiling information as to how US exports may have buffered the worst (so far) of problems from a faltering US housing market:

Did we dodge a bullet? Paul Krugman, Jan 1: In a recent post I pointed out that up through the third quarter of 2007 rising exports had roughly offset the impact of the housing bust. Here’s the chart again. (By the way, all of the data come from the Bureau of Economic Analysis, which has fairly easy-to-use interactive data tables.)

Exports (red) versus housing (blue), % of GDP

So did the U.S. economy dodge a bullet?

Yes, it did — which is why I haven’t been as sure about a looming recession as, say, Larry Summers or Marty Feldstein, let alone Nouriel Roubini. (No, I’m not always a doom and gloom guy — only when the situation warrants, which has been pretty often lately.)

While we dodged a bullet, however, there are between one and three more bullets headed our way.

First, housing has further to fall. There’s been a further plunge in building permits and starts since the credit crunch began in August; these take a while to be reflected in construction spending, so there’s a fresh hit to GDP definitely in the pipeline. Even now, residential investment as a share of GDP is only down to its long-run average; you’d expect it to fall below that average for an extended period.

Second, there are hints of a slump in business investment, especially commercial real estate, which seems to have had a bubble of its own and is feeling the effects of the credit crunch.

Third, there are hints that consumers have finally started to cut back.

On the other hand, exports still seem to be growing fast.

So I’m actually uncertain about where things go this year.

But as Krugman points out, we are going to have to wait and see how bad the fallout is from "consumers starting to pull back," from "slumps in business investment" as folks try to navigate their way through the credit crunch, and as the US housing sector continues to falter. We do indeed live in "interesting times."