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Hard Slog Continues But May Be Brightening For California Exporters

August 5, 2016 - It has not been a gratifying year for California exporters, but June saw the beginning of better trends.

According to Beacon Economics’ analysis of U.S. trade statistics released this morning by the Census Bureau, the nominal value of shipments to foreign destinations totaled $14.65 billion, 3.0% below the $15.11 billion recorded in same month last year.

The state’s exports of manufactured goods in June fell by 6.7% to $8.79 billion from $9.42 billion one year earlier. Exports of non-manufactured goods (chiefly agricultural products and raw materials) were off by 9.4%, falling to $1.54 billion from $1.70 billion the previous June. Re-exports, however, rose 8.3% to $4.32 billion from $3.99 billion.

These declines have been partly driven by weak global demand and partly driven by export price declines due to the recent appreciation of the U.S. dollar. However, once we control for prices, the data presents a better picture. The real flow of exports actually increased by .5% from last year. On a real, seasonally adjusted basis export values hit $13.8 billion in June—this is the best result since October 2015.

“The global economic slowdown has clearly had an impact on state exporters but I think we can look at the glass being half full rather than half empty at the moment,” said Christopher Thornberg, Founding Partner of Beacon Economics. “Despite the high value of the dollar and issues in the Asian markets, our most important export markets outside of NAFTA, exporters managed to keep their flows of products steady."

And now that the global economy is beginning to stabilize, the arrow is starting to move in the right direction, said Thornberg. “We have a ways to go, but I am encouraged by these numbers.”

California accounted for 11.7% of the nation’s merchandise export trade in June. By way of comparison, the value of overall U.S. merchandise exports in June dropped by 4.6%, while exports from Texas fell 11.2%. Florida's export trade was off in June by 7.5%.

Through the first half of 2016, California’s $78.67 billion merchandise export trade lagged last year’s $83.12 billion total over the same period by 6.1%. It was also 8.7% lower than the state’s nominal export total in the first six months of 2014.

"There is cause for concern among California's export businesses,” said  Jock O’Connell, Beacon Economics’ International Trade Adviser. Re-exports accounted for nearly 30% of California’s total export trade in June. These are, by definition, previously imported goods that have undergone no material change or enhancement in value while in this country. “In contrast to goods we export that were actually manufactured, grown or otherwise produced here in California, the state derives a fairly negligible economic benefit from re-exports,” O’Connell said.

A Closer Look At The Numbers

As always, Beacon Economics cautions against reading too much into month-to-month fluctuations in state export statistics, especially when focusing on specific commodities or destinations. Significant variations June occur as the result of unusual developments or exceptional one-off trades and June not be indicative of underlying trends. For that reason, Beacon Economics compares the latest three months for which data are available (i.e., March-June) with the corresponding period one year earlier.

California's merchandise exports during the latest three-month period totaled $40.83 billion, a nominal decline of 6.4% from the $43.61 billion recorded during the same period last year.

The state's export trade is highly diversified. In the second quarter of 2015, eleven major categories of goods each accounted for at least $1 billion in exports. However, in the same quarter this year, just nine categories hit that mark. Performance also varied, with only two categories showing a year-over-year improvement.

On the plus side, exports of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) were up 2.2% from $34.15 billion to $4.24 billion. Chemical exports (including pesticides and fertilizers; pharmaceutical products; paints and adhesives; soap and cleaning products; and raw plastics, resins, and rubber) also edged up by 1.0% from $3.38 billion to $3.41 billion.

On the downside, there was a 6.1% fall-off in the state’s exports of Computer & Electronic Products (computers and peripherals; communication, audio, and video equipment; navigational controls; and electro-medical instruments). Exports of these items fell from $10.93 billion to $10.23 billion.

Exports of Transportation Equipment (automobiles, trucks, trains, boats, airplanes, and their parts) also declined, falling 2.6% from $4.79 billion to $4.67 billion. Non-Electrical Machinery (machinery for industrial, agricultural and construction uses as well as ventilation, heating, and air conditioning equipment) exports declined sharply, dropping 15.4% from $4.14 billion to $3.50 billion.

Exports of Agricultural Products plummeted 11.8% from $3.43 billion to $3.02 billion. Food and Kindred Products exports were likewise off by 13.1% from $2.46 billion to $2.14 billion.

Exports of Electrical Equipment (including household appliances) drifted lower by 5.8 from $1.77 billion to $1.66 billion. Fabricated metal exports dipped by 1.6% from $1.05 billion to $1.04 billion.

Petroleum and Coal exports collapsed by 36.5% from $1.47 billion to $861 million. This category includes refined petroleum products, such as gasoline, lubricating oils, and asphalt as well as coal and pet coke. Exports of Fabricated Metal products fell 1.0% from $1.06 billion to $1.04 billion. Exports of Waste & Scrap fell 22.2% from $1.06 billion to $826 million.

Despite a sharp 13.7% drop, Mexico continued to rank as California’s single largest export destination during the latest three-month period, with the value of exports tumbling from $7.13 billion to $6.15 billion. Exports to Canada fell more modestly, dropping by 4.5% from $4.37 billion to $4.18 billion, while shipments to China declined by 7.5% from $3.76 billion to $3.48 billion. Exports to Japan also slipped, falling by 2.7% from $3.01 billion to $2.93 billion. Rounding out the Top Five California Export Markets in the latest quarter was Hong Kong with a 6.2% rise in exports from $2.0 billion to $2.12 billion.

California’s exports to South Korea and Taiwan plunged in the latest quarter by 17.9% and 15.4%, respectively.

Regionally, California's exports to the Asia Pacific region (including Australia and New Zealand) fell 7.0% from $16.33 billion to $15.19 billion. The state’s exports to the European Union slipped 1.1% from $7.49 billion to $7.41 billion. Interestingly, California exports to the United Kingdom, which voted in June to leave the EU, actually rose in the latest quarter by 1.9%.

Exports to Latin America and the Caribbean (excluding Mexico) were down by 6.8% from $2.33 billion to $2.17 billion. California’s exports to South Asia (chiefly India and Pakistan) remained unchanged at 1.41 billion. The state’s exports to Sub-Saharan Africa in the latest three months continued to shrivel, falling 24.5% from $202.1 million to $152.7 million.

By mode of transportation, 49.2% of California’s $40.83 billion merchandise export trade in the latest three months was shipped by air, with Los Angeles International and San Francisco International Airports accounting for the vast majority of the state’s airborne trade. Seaports handled 27.7% of the state’s export trade by dollar-value, while 23.1% traveled overland to Canada and Mexico. The relatively high share of California’s export trade that is airborne reflects the state’s emphasis on the production of high-value and often low-weight goods, including perishable farm produce.

The Outlook

While starting to move in the right direction, the prospects for a quick or full return of California’s merchandise export trade to a growth trajectory anytime soon are not especially promising. While we feel the panic caused by the Brexit was out of proportion, nevertheless, there is going to be an impact on the strength of the dollar that will in turn continue to challenge all U.S. exporters.

The World Bank recently ratcheted down its forecast for 2016 global growth to 2.4%, one-half percent below the Banks’s January forecast. Similarly, the International Monetary Fund last month s dampened its global economic outlook for 2016: "Growth in most advanced economies remained lackluster...with some improvement for a few large emerging markets—in particular Brazil and Russia."

O’Connell noted that those seem hardly the nations anyone should count on to spark a global economic recovery.

California Imports

The U.S. Department of Commerce has determined that California was the state-of-destination of 18.3% of all U.S. merchandise imports in June, with a value of $35.55 billion, down 1.3% from the $36.00 billion in imported goods in June of 2015.

Manufactured imports totaled 31.49$ billion, off 2.2% from $32.19 billion last year. Non-manufactured imports in June were valued at $3.06 billion, down 19.7% from $3.81 billion a year ago. California’s imports reflect the 3.8% year-over-year fall-off in overall U.S. merchandise imports in June.

Note: The U.S. Commerce Department has been publishing state-of-destination import statistics since 2008. Beacon Economics has long felt that state import data provide a highly misleading indication of the state in which imported goods were ultimately consumed. As a major gateway for the nation’s foreign trade, California has consistently been credited with an out-sized share of U.S. merchandise imports. However, we now believe that the process by which state-of-destination import statistics are compiled has become stable enough to be used to measure relative increases or decreases in the value of imported goods consumed or otherwise used by residents or businesses located in California. We emphasize that we are primarily interested in determining trends. We continue to think it highly inadvisable to combine state export and import statistics to calculate a state trade balance.

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