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Why Monitoring US Net Exports May Be Crucial Right Now

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What are net exports?

A country’s net exports measure the value of total exports minus the value of its total imports. This indicator is positive if exports are larger in value than imports; otherwise, it is negative. Net exports go into calculating the GDP (gross domestic product) of a geography. Hence, if a country imports more than it exports, the excess value of its imports reduces its economic output.

Two major factors contribute to determining net exports: the condition of the world economy and the state of a nation’s currency against the US dollar.

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If the world economy, especially a country’s major trading partners, is not doing well, a nation can lose consumers for its products. Meanwhile, if the currency of a nation is strong against the greenback, its goods and services can be more expensive in the international market, diverting consumers to other nations.

How are US net exports looking?

The graph above shows that the last time the net export situation was clearly in favor of the US was in 4Q13. During that quarter, exports had surged by ~11% and imports had risen by just 1%. From 1Q14–2Q15, three quarters have seen a reversal in this trend, when exports either contracted or were outpaced by imports. Until the values read negative, both exports and imports are expanding.

The Federal Reserve’s take

In its monetary policy statement released on July 29, 2015, the Federal Reserve said about net exports what it had said about business fixed investment—that they were “soft.” With two of its three components subdued, economic growth should remain under scrutiny by the Fed.

A primary driver for this state of net exports has been the US dollar. A strong greenback (UUP) against major currencies like the euro (FXE) and the Japanese yen (FXY) led companies like Groupon (GRPN), Pfizer (PFE), and Omnicom Group (OMC) to warn investors about a hit on revenues in 2015 earlier in the year.

Let’s take a look at US currency in the next article.

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