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Overall, the global economic slowdown and the disappointing pace of expansion in this country have slowed the growth pace of both exports and imports. Until recently, both seemed to boom with the economic recovery, anemic as it otherwise was. Between mid-2010 and mid-2011, for example, the country brought in almost 13% more imports of both goods and services, while the rest of the world bought about 14% more from the United States. But in the 18 months from mid-2011 through June 2012 (the most recent month for which complete data are available), exports have expanded barely over 7%, while imports have grown only 2.2%. The imbalance of imports over exports has shrunk, from a monthly deficit of $50.3 billion in June 2011 to $42.9 billion this past June, an almost 15% improvement.
Though the dollar has gained value against the euro recently, the more relevant influence on trade has been its longer-term decline against the euro and most other major currencies. Even with its recent losses, the euro’s overall gain against the dollar during the last 10 years verges on 30%. Japan’s yen has risen almost 40% and China’s yuan almost 25%. By making the dollar cheaper globally, these currency moves have made American products much more affordable to foreign buyers. By making other currencies more expensive, these same currency moves have made foreign products dearer to those with dollar incomes—that is, Americans. The net impact has brought more foreign buying to American-based producers and has persuaded more Americans to buy at home. To be sure, the euro’s 5.7% decline since last spring has undone some of this effect, but even now, according to the International Monetary Fund, the euro is not especially cheap, at least relative to European production costs, while Japan’s yen, still near all-time highs, remains remarkably pricey.
More recently, an even more fundamental difference has factored into this country’s trade equation. Fracting technology has given Americans cost-effective access to domestic petroleum resources, mostly natural gas, which once seemed inaccessible. By reducing the need for imports, this advance has begun to address the biggest single factor keeping this country’s foreign trade account in deep deficit. The change has appeared dramatically in just the last 18 months of data. According to the Commerce Department, overall petroleum exports during this time have risen 25.3%, while imports have dropped 8.3%. The role of fracting is more evident in finer levels of detail. Though crude oil imports, mostly for the distillation of gasoline, have risen 3.3% year to date, imports of natural gas have dropped nearly 70%, while imports of liquefied petroleum products, again mostly natural gas, have declined more than 30%. Still more, as cheaper domestic natural gas has convinced families and businesses to switch from oil heat, imports of fuel oil have also dropped, by almost 6%.
Looking forward, there is always a chance that dollar strength will turn pricing against American producers once again. Though not probable, it is possible. But even if the dollar were to gain a lot of ground, it has depreciated so far against most currencies that it would take quite a move to reverse the present American pricing advantage. Even the recent dramatic drop in the euro’s dollar value has failed to erase that advantage entirely. And even if a dramatic move were to turn pricing against American producers, it would take months, possibly years, to unwind trade relationships built up over the long time that Americans have had some advantage, relationships that have only begun to tell during the last few years.
Meanwhile, the petroleum situation should continue to help reduce the trade deficit. Already the shortfall between petroleum exports and imports has narrowed from about half the country’s overall trade deficit to some 39%. As the availability of domestic natural gas increases, especially as technology erases some of the environmental concerns, it will have a still greater fundamental impact. No one expects the trade balance overall to swing into surplus anytime soon, much less the balance on petroleum products, but, in general, the clouds overlaying this longer standing area of anxiety seem set to continue lifting.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.