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.7.The employment series were not trend adjusted, but figure 5.1 showed that there wasnot a large trend, and certainly not a significant upward trend.PERSISTENT DOLLAR SWINGS AND THE U.S.ECONOMY 91Copyright 2003 Institute for International Economics | http://www.iie.com Table 5.1 The impact of trade in goods on GDP growthContributions to real GDP growth average ofthe quarterly figures (percent)Goods Goods NetPeriods exports imports exports1997Q1 - 2000Q2 0.54 1.40 0.862000Q3 - 2002Q2 0.29 0.09 0.38Contribution to the growth slowdown 0.83 1.31 0.48Source: Bureau of Economic Analysis, http://www.bea.gov, table S.2.to rise until February 2002.Dollar movements in 2000, 2001, and early2002 exacerbated the cyclical downturn in manufacturing.Keep in mind, however, that even though dollar movements werehurting manufacturing, foreign trade generally acts as an automatic stabi-lizer for the economy, and for manufacturing specifically, and it did soin this downturn.One way to show this is to look at the contributionsto real GDP growth coming from the different components of GDP, ascomputed by the Bureau of Economic Analysis.Table 5.1 shows howexports, imports, and net exports of goods added to or subtracted fromreal GDP growth over the period leading up to the growth slowdownand the period after the growth slowdown started (1997Q1 through2000Q2 versus 2000Q3 through 2002Q2).The table shows that growth ingoods exports contributed to overall GDP growth in the period beforethe start of the slowdown, adding 0.54 percent a year to the annual averagegrowth rate.Goods imports, on the other hand, subtracted 1.4 percent ayear from the rate during those same boom years.The net impact ofgoods trade was to reduce GDP growth by 0.86 percent a year duringa period when GDP growth averaged over 4 percent a year.After the downturn started, there was a falloff in exports, and thisreduced overall growth by 0.29 percent a year.The strong dollar and theweakness in the rest of the world economies adversely affected US growth.On the other hand, the turnaround in imports was even more dramatic.Imports declined, and since imports are a subtraction from GDP, thisimport decline reduced almost to zero the negative contribution to GDP.The net effect of goods trade was to reduce GDP growth both beforeand after the middle of 2000, but the reduction in growth was far greaterduring the boom years ( 0.86) than during the downturn ( 0.38).Onbalance, goods trade mitigated the decline in growth by nearly half apercentage point a year (0.48).These findings reinforce the message fromfigure 5.4.The sharp drop in manufacturing employment that started inmid-2000 was the result of the shift in domestic demand for manufacturedgoods.The high dollar and the weakness of overseas economies reducedbut did not entirely eliminate the role that trade in goods plays as an92 DOLLAR OVERVALUATION AND THE WORLD ECONOMYCopyright 2003 Institute for International Economics | http://www.iie.com automatic stabilizer to the manufacturing sector and the whole USeconomy.Profits in ManufacturingFigure 5.5a shows the real profits earned by the domestic operations ofall nonfinancial US corporations from 1973 through the first quarter of2002 (adjusted by the implicit price deflator for nonfinancial corporateoutput).Profits are strongly cyclical, turning down in 1974-75, in the early1980s, and in the recent downturn.The rapid rise of profits for much ofthe 1990s is remarkable, a runup that reached its peak in the third quarterof 1997.After that, profits weakened until mid-2000 and then fell sharplyuntil the third quarter of 2001.They have made a modest comeback sincethen and remain at a substantially higher level than in the late 1980s.8The fall in profits with the downturn was to be expected, but the profitweakness after 1997 is more puzzling.One possibility is that companieswere overreporting profits in the bubble frenzy of the 1990s, but eventuallyran out of ways to use creative accounting.Another possibility is that thestrong dollar was exposing domestic operations to severe competitivepressure.The path of profits in the 1980s suggests a more limited role for thedollar, with the cycle as the primary cause of variations.The dollar reacheda peak in March 1985, while profits increased strongly from 1983 to 1985,reaching a peak in the third quarter of that year.The dollar then fellsharply, but profits weakened through early 1987.Figure 5.5b explores this idea further, dividing total profits of nonfinan-cial corporations into those generated by domestic manufacturing indus-tries and nonmanufacturing industries (same deflator as above).9 (Unfor-tunately, the industry profit data do not include the capital consumptionadjustment (CCA).For the total nonfinancial sector this makes a bigdifference to profits in the second half of 2001, when economic profits(including CCA) are much stronger than reported profits because of taxlaw changes.)10Although there is international trade in services, it is a trivial part of thetotal of US output of services, so figure 5.5b provides a good comparison ofthe tradable and nontradable sectors.In the cyclical peak 1989-90, thelevel of profits in manufacturing and nonmanufacturing were similar.In8.In part this is because interest rates dropped in the 1990s and so the debt service burdenon nonfinancial corporations declined.9.Since many corporations have both manufacturing and nonmanufacturing operations,the breakdown reflects the best estimates of the Bureau of Economic Affairs staff and isnot precise.10.See Survey of Current Business, April 2002, 5-7.PERSISTENT DOLLAR SWINGS AND THE U.S.ECONOMY 93Copyright 2003 Institute for International Economics | http://www.iie.com Figure 5.5a Nonfinancial corporate profits, domestic USoperations, 1987-2002Figure 5.5b Nonfinancial nonmanufacturing and manufacturingcorporate profitsNote: Corporate profits with inventory valuation adjustment.Deflated with gross product priceindex for nonfinancial industries.Source: Bureau of Economic Analysis, www.bea.gov, table 6.16c.94 DOLLAR OVERVALUATION AND THE WORLD ECONOMYCopyright 2003 Institute for International Economics | http://www.iie
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