Net Exports and Your Mutual Fund Investments



Policymakers’ views

In the previous article, we looked at consumer spending, the most important aspect of the US economy. However, net exports (exports minus imports) are also important for the US economy. We’d like to emphasize at the outset that the United States is a net importer of goods, which means that net exports contribute negatively to the overall economic output. However, the fall in net exports has been exacerbated by a strong dollar, which has depressed exports, and rising consumer demand, which has fueled imports.

Although Stanley Fischer, vice chair of the Federal Reserve, agreed that the pressure on net exports from the strong US dollar has been a “significant drag” and may persist for some time, he said this may be “outweighed by the other sources of growth.”

Lael Brainard, a Federal Reserve policymaker, pointed out that net exports reduced ~1 percentage point from the US GDP (gross domestic product) in the first part of the year. She said “the most recent trade data suggest another substantial subtraction in the third quarter.”

Article continues below advertisement

Impact on investors

The graph above shows that the last time the net exports situation was clearly in favor of the United States was in 4Q13 when exports surged by ~11% and imports rose by just 1%. From 1Q14 until 2Q15, three quarters have seen a reversal in this trend. Exports either contracted or were outpaced by imports.

A strong dollar has weighed on overseas revenues of exporters such as ExxonMobil (XOM), Honeywell International (HON), Colgate-Palmolive (CL), and Oracle (ORCL). Until US domestic consumption is holding up or rising, it will counterbalance the negative impact of falling net exports. However, if consumer demand takes a negative turn, falling net exports will add to an economic slowdown in the United States.

A slowing economy coupled with reducing profits isn’t good for mutual funds such as the American Funds Growth Fund of America – Class A ETF (AGTHX) and the Hartford Capital Appreciation – Class A ETF (ITHAX).

In the next article, we’ll look at a factor closely associated with economic growth: inflation.


More From Market Realist