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Welcome to the California Trade Report, Beacon Economics’ monthly analysis of California’s international trade activity. This report analyzes data released by the U.S. Census Bureau’s Foreign Trade Division and pinpoints important trends in the state’s import/export industry, identifying potential effects on the state’s economy. The report is only a sampling of the kind of economic research and data analysis available from Beacon Economics.

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California Exports Rebound

June 4, 2015 - The value of California’s merchandise export trade rebounded in April, edging up a nominal 2.1% from the same month last year, according to a Beacon Economics analysis of foreign trade data released this week by the U.S. Commerce Department.

The state’s exports of goods to foreign markets in April totaled $14.39 billion, up from the $14.09 billion recorded in April 2014. By way of comparison, total U.S. exports of goods saw a 4.2% decline in the same period, while exports from Texas shrank by a full 9.0%.

California’s exports of manufactured goods rose 2.1% from $9.41 billion to $9.43 billion. However, exports of non-manufactured goods (chiefly agricultural produce and raw materials) slipped by 2.5%, from $1.81 billion in April 2014 to $1.76 billion in the latest numbers. Re-exports meanwhile surged by 11.3% from $2.87 billion to $3.20 billion.

Despite April’s positive news, California’s export trade so far this year is lagging last year’s pace by 2.8% due to fall-offs in foreign shipments in February and March.

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 may occur as the result of unusual developments or exceptional one-off trades and may not be indicative of underlying trends. For that reason, Beacon Economics compares the latest three months for which data are available (i.e., February 2015 - April 2015) with the corresponding period one year earlier.

California's merchandise exports during the February-April period totaled $41.92 billion, a nominal decline of 3.1% from the $43.26 billion recorded during the same period twelve months earlier. The state accounted for 11.0% of total U.S. merchandise exports in the latest three months.

California’s export trade is highly diversified. Normally, eleven major categories of goods have each accounted for at least $1 billion in exports in each three-month period. However, this February-April period saw that number fall to ten, as exports of Waste and Scrap fell just below the $1 billion threshold. Among the top ten categories, performance was variable with only four categories showing growth.
Topping the export list was Computer & Electronic Products, up 7.8% from $9.90 billion to $10.67 billion. Exports of Agricultural Products continued to recover from recent declines with an 11.0% increase from $3.22 billion to $3.57 billion. Non-Electrical Machinery exports gained 2.4% from $3.90 billion to $3.99 billion. Likewise, Electrical Equipment exports rose 4.5% from $1.68 billion to $1.76 billion.

On the downside, Transportation Equipment exports fell 16.5% from $4.89 billion to $4.08 billion. Exports of Miscellaneous Manufactured Commodities (a catchall category of merchandise ranging from medical equipment to sporting goods) were down 2.5% from $3.51 billion to $3.42 billion. Exports of Chemicals fell 2.8% from $3.48 billion to $3.38 billion. Food and Kindred Products exports continued to stagger, down 14.8% from $2.82 billion to $2.40 billion. Petroleum and Coal Products exports declined sharply, falling 24.8% from $1.96 billion to $1.47 billion. Exports of Fabricated Metal Products slipped by 12.2% from $1.20 billion to $1.06 billion.

Mexico continued to rank as California’s single largest export destination during the latest three-month period, with the value of exports rising 14.4% from $5.94 billion to $6.79 billion. Exports to Canada fell by 4.7% from $4.45 billion to $4.24 billion, while shipments to China tumbled by 9.8% from $3.93 billion to $3.54 billion. Exports to Japan remained unchanged at $3.07 billion. South Korea (up 8.6% from $2.19 billion to $2.38 billion) rounded out California's ‘Top Five’ national export destinations in the February-April period.

Regionally, California's exports to the Asia Pacific region (including Australia and New Zealand) dropped 3.6%, falling from $16.28 billion to $15.64 billion, a dip propelled largely by the fall-off in exports directly to China. California’s exports to the European Union dipped slightly, slipping 1.9% from $7.67 billion to $7.53 billion. California’s exports to Latin America and the Caribbean (excluding Mexico) were down by 16.6%, dropping from $2.89 billion to $2.41 billion. California’s exports to South Asia (chiefly India and Pakistan) were up by 33.1% from $1.02 billion to $1.34 billion. The state’s exports to Sub-Saharan Africa in the latest quarter amounted to just $194 million, down 16.50% from $233 million during the same period twelve months ago.

By mode of transportation, 46.2% of California’s $41.92 billion merchandise export trade in the last 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 31.6% of the state’s export trade, while the remaining 22.2% traveled overland by truck or rail to Canada and Mexico.
While considerable attention has been focused in recent months on the economic impact of congestion at the state’s major seaports and the fall-out from a contentious longshore labor contract negotiation, it is worth noting that containerized shipments comprise only about one-fifth of the value of California’s merchandise export trade. On a dollar basis, the state's airports play a considerably more critical role than its seaports in facilitating its merchandise export trade.

The Outlook

Growth in the United State tipped into negative territory in the first quarter of 2015 largely driven by trade—real exports are down while real imports are up. “What is interesting is that the nominal trade deficit through the first 4 months of the year is only 2% larger than the first 4 months of last year,” said Christopher Thornberg, Founding Partner of Beacon Economics. “This is largely due to the fact that while we are importing more, the relative price of imports is down a lot—and because of that, financially, the U.S. is no worse off. Part of this is due to the collapse in oil prices, part is due to the appreciation of the U.S. dollar which has made all imports cheaper to buy.”

But Thornberg says it is a mistake to blame the increase in the real trade deficit solely on the appreciation of the dollar. The rise of the dollar can be tracked largely to the announcement of the European Central Bank’s Quantitative Easing Program, which was designed to increase lending and reduce rates in the Euro Zone. The dollar’s appreciation against the euro has been the largest—up almost 12% over the last year. But the largest increase in the nominal trade deficit has not been with Europe – it has been with China, Korea, and Taiwan. And the U.S. dollar has actually depreciated modestly against the Chinese Yuan over the last year. In other words, the current trade situation has more to do with a clear slowdown in growth in the Chinese economy and the impact that is having across Asia.

Beacon Economics’ outlook for California’s merchandise export trade remains guarded. Water issues will only grow more and more contentious this year, but the drought's impact on agricultural exports will vary by commodity. The ongoing progression of California agriculture toward high-value specialty crops will likely buoy the value of the state's farm export trade, even if volumes decline. Less clear is the impact water-use restrictions will have on manufacturing and food processing operations that are heavy water users and which may be hard-pressed to invest in measures to slash water consumption.

Foreign trade generally is apt to be less than robust throughout the year. Mexico and Canada – the state’s two top export destinations – have recently cut their respective economic growth forecasts for 2015, while Japan expects to see its economy expand by less than 1% this year. Meanwhile, China’s economic growth rate is expected to continue ebbing. The official forecast is holding at 7% this year, but the actual rate is widely expected to be somewhat lower. On a more encouraging note, the European Union is showing signs of working its way out of its years-long malaise.

Also favorable, as Beacon Economics has observed previously, a significant portion of California’s export trade to Mexico are components shipped to assembly plants south of the border where they are incorporated into a wide array of goods that are then exported back to the United States. As a result, the state’s merchandise exports to its leading export market tends to mirror U.S. economic performance as much, if not more, than the economic performance of its closest neighbor.

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