The Strength of U.S. Machinery Exports in 1975: An Analysis of Price Competitiveness and Special Demand Factors

February, 1976

THE STRENGTH OF U.S. MACHINERY EXPORTS IN 1975: AN ANALYSIS OF PRICE COMPETITIVENESS AND SPECIAL DEMAND FACTORS

by

Peter Hooper and Peter Isard

NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to International Finance Discussion Papers (other than an acknowledgement by a writer that he has had access to unpublished material) should be cleared with the author or authors.

Peter Hooper and Peter Isard* February 27, 1976

The Strength of U.S. Machinery Exports in 1975: An Analysis of Price Competitiveness and Special Demand Factors

U.S. merchandise exports increased in value by nearly 10 per cent in 1975, despite the decline in economic activity abroad. Machinery exports accounted for over half of this increase, expanding to a level of $28.8 billion, or slightly more than one quarter of total merchandise exports. Machinery exports grew roughly 20 per cent in 1975, following a 40 per cent increase in 1974,

Most of last year's increase in machinery exports was reflected in higher prices, but the volume of shipments also increased, which is remarkable in view of the sharp drop-off in the volume of total world trade, This relative strength of U.S. machinery exports can be explained primarily by (1) several special factors which resulted in strong world demand for machinery relative to other goods in 1975, and (2) a substantial improvement since 1970 in the price competitiveness of the United States as a machinery exporting country. These underlying developments are discussed in Sections 1 and 2, respectively. In addition, roughly one-tenth of the expansion of machinery exports in 1975 reflects a rundown in the backlog of unfilled orders, which is discussed in Section 3. In Section 4 the growth of machinery export volumes and values is broken down by commodity groups and importing areas, and in Section 5 we consider the outlook for U.S. machinery exports in 1976.

*/ The views expressed herein are solely those of the authors and do not necessarily represent the viewsof the Federal Reserve System.

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1. Special Factors Underlying the Relatively-Strong World Demand for Machinery in 1975

Trade data available for the first half of 1975 (at an annual rate) show that the volume of machinery exported by the world's three major suppliers (the United States, Germany, and sapan)y= fell by 3 per cent from its level in 1974 as a whole, substantially less than the estimated 8 per cent drop in the volume of total world trade. One factor underlying the relative strength of world demand for machinery was the very large purchases of machinery by the OPEC countries, which experienced a boom in investment activity during 1975,

| A second source of strength was the increased emphasis placed throughout the world on investment in the energy sector, which has contributed to relatively strong demands for power generating machinery and drilling and mining equipment. U.S. exports of these machinery items increased strongly last year, even to industrial countries, where total investment expenditures fell sharply. In addition, the boom in farm incomes during the past few years has stimulated demand for agricultural machinery. (The importance of agricultural and energy-related machinery in the growth of U.S, exports is described in Section 4 below.)

Finally, exports to non-OPEC developing countries were stronger than might have been expected in view of the estimated 6 per cent drop in their export earnings in 1975. Total U.S. exports to non-OPEC developing countries were 11.5 per cent greater in the first half of 1975 than in ~~ I/ These three countries accounted for 55 per cent of the value of world machinery exports in 1973, Ranked by shares in world exports, the major machinery exporting countries in 1973 were Germany (24%), the United

States (20%), Japan (11%), the United Kingdom (9%), France (8%), Italy (6%), the Netherlands (4%), and Canada (3%).

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1974 as a whole, Machinery exports, which account for one quarter of total U.S. exports to these countries, rose by 17 per cent during the

same period.

2. The Price Competitiveness of the United States as a Machinery Exporter

Foreign demand for U.S. machinery in recent years has also been stimulated by a substantial improvement in U.S, price competitiveness. Between 1970 and the first three quarters of 1975, German and Japanese export prices (in dollars) rose by 116 per cent and 52 per cent, respectively, compared with an increase of 40 per cent for the United States; see Table 12! As a result, the price of U.S. machinery exports fell, relative to a weighted average of German and Japanese export prices, from an index level of 1.0 in 1970 to .73 the first three quarters of 1975. Most of this improvement in U.S. price competitiveness occurred between 1970 and 1973, however, reflecting the sharp depreciation of the dollar against the mark and the yen during that period. The ratio of U.S, to German and Japanese machinery export prices remained fairly constant between 1973 and the first half of 1975, and then rose sharply when the dollar appreciated in the third quarter of last year.

The aggregate relative price movements shown in Table 1 were evident in a broad range of machinery items; see Table 2. Much of the improvement in the U.S. relative price position, both in the aggregate and across individual machinery items, was due to the net depreciation of the ~~ 27 Table 1 provides both the unit value index for U.S. machinery exports and a weighted average of disaggregated machinery export prices compiled by the Bureau of Labor Statistics, Although the latter index is based on data which cover only 55 per cent of U.S. machinery exports, the unit value index is felt to be a less accurate measure of price changes due to its failure to hold constant the commodity mix of the items

whose prices are sampled. The German and Japanese export price data are not unit values, and are consistent with the BLS data.

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Table 2: Dollar-Equivalent Price Indexes for Selécted Categories of Machinery Exports

From the United States, Germany and Japan: 1970 - 1975

(1970 = 100) United United Year States Germany Japan Year States Germany Japan Internal Combustion Engines Metal-Working Machinery 1970 100 100 100 1970 100 100 100 1971 105.3 111.3 106.3 1971 104.5 115.4 106.7 1972 106.7 127.3 120.7 1972 106.7 131.5 122.7 1973 =: 107.8 161.3 138.3 1973 112.3 166.6 144.4 1974 124.0 179.8 154.0 1974 137.5 189.9 186.0 1975 148.7 220.7 1975 164.2 230.8 Agricultural Tilling Machinery Pumps 1970 100 100 100 1970 100 100 100 1971 103.2 113.2 103.7 1971 103.9 111.6 104.6 1972 109.6 126.8 114.8 1972 104.5 125.3 120.5 1973 116.3 155.5 128.0 1973 110.6 155.2 156.3 1974 125.6 173.3 156.5 1974 118.4 177.4 179.0 1975 172.4 212.1 1975 155.7 216.2 Office Calculating Machines Forklift Trucks 1970 100 100 100 1970 100 100 100 1971 96.5 107.4 83.4 1971 103.5 115.6 103.1 1972 97.0 111.4 56.6 1972 108.9 133.2 111.8 1973 98.5 134.1 49.1 1973 112.2 169.9 129.3 1974 97.6 139.2 43.4 1974 137.2 191.2 154.7 1975 =: 101.8 151.0 1975 = 166.9 228.0

Notes: The matching of items across countries within each of the 6 machinery categories is not exact. U.S. export price indexes are based on BLS transactions price data for June of each year, for SITC items 711.5, 712.1, 714.2, 715.1, 719.2 except 719.23, and 719.32, which respectively represented 7,0, 0.4 3.6, 2-1, 3.9, and 0.9 per cent of U.S. machinery exports in 1973. German and Japanese data are annual averages of monthly export price indexes, except for the 1975 German indexes, which are based on June 1975 data. For more detailed information see the data source listing at the end of this note.

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dollar,” But, relative rates of domestic-currency inflation and movements in home-currency measures of unit labor costs also favored U.S. exports, as shown in Table 3.

The impact of these relative price movements on U.S. exports is reflected in the changing U.S. share of combined U.S., German and Japanese machinery export volumes. Between 1970 and the first three quarters of 1975, the U.S. share in volume rose from 43 per cent to 49 per cent, as shown in Table 4, Japan's share rose from 17 to 20 per cent, while Germany's share fell from 40 to 32 per cent. There was little change in export value shares over the same period, however, because Germany's greater price increase offset its lesser volume increase .4/

3. Changes in the Backlog of Unfilled Machinery Orders

Approximately one-tenth of last year's increase in machinery exports reflects a run-down in the backlog of unfilled orders, which had piled up rapidly during 1973 and 1974 when capital outlays abroad were strong and when domestic producers of machinery were experiencing capacity bottlenecks. At the end of 1974, unfilled export orders stood at 3.9 month's worth of export shipments, compared with an average ratio of 3.4 for the 1969-1972 period; see Table 5. During 1975 this ratio ~~ 37 The 1975 figures in Table 2 are based on June data and do not reflect the dollar's appreciation in the second half of the year.

4/ 1975 data show a 21 per cent increase from 1974 in the value of new orders for U.S. machinery exports, and a decline in thc dollai value

of new orders for German machinery exports, which suggests that the

United States will increase its value share in export shipments relative to Germany in 1976.

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Table 3: Indexes of Unit Labor Costs in Both Local Currency Units and Dollars* es (197 -- 100)

Y Seates Germany Japan

a mLcts) ULC(Marks) _ULC($) ULC Yen) ULC($)

1970 100 100 100 100 100

1971 101.1 108.4 113.8 111.9 115.3

1972 106.2 113.9 130.4 119.6 141.4

1973 111.7 120.8 166.4 129.5 171.9

1974 127.8 135.0 190.7 168.5 207.8

1975 142.5 150.0 222.7 213.5 258.7

*pased on data provided by Michael Crosswell, "Unit Labor Costs in Manufacturing in Major Industrial Countries" memorandum to Mr. Siegman, Feb. 10, 1976. Crosswell's source is unpublished data provided by the Bureau of Labor Statistics. 1975 figures are based on data for January through September.

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Machinery Export Values, Volumes and Shares for the United States, Germany Table 4: and Japan: 1970 - 1975

Machinery Export Values (billions of $)

Year U.S. Germany Japan Total 1970 11.37 10.57 4.39 26.33 1971 11.57 12.08 5.32 28.97 1972 13.25 14.58 6.81 34.64 1973 17.13 20.58 9.06 46.77 1974 23.69 26.12 11.79 61.60 19752!

27.72 27.77 12.17 67.66

Machinery Export Volumes (billion of 1970 gyb/

U.S. Germany Japan Total 1970 11.37 10.57 4.39 26.33 1971 11.46 10.69 5.12 27.27 1972 13.04 11.33 6.08 30.45 1973 16.19 12.63 6.97 35.79 1974 19.91 14.17 7.86 41.94 19752/ 19.872! 12.88 8.00 40.75

Country Shares in the Exports of the Three Countries Combined

Value Shares(%) > _.____——sCVolume Shares (%)

Year U.S. Germany Japan U.S. Germany Japan 1970 43.2 40.1 16.7 43.2 40.1 16.7 1971 39.9 41.7 18.4 42.0 39.2 18.8 1972 38.3 42.1 19.7 42.8 37.2 20.0 1973 36.6 44.0 19.4 45.2 35.3 19.5 1974 38.5 42.4 19.1 47.5 33.8 18.7 19758/ 41.0 41.0 18.0 48.8 31.6 19.6 a/

Data for the first three quarters of 1975 at annual rates,

b/Constructed using export price indexes from Table 1 as deflators.

c/U.S, data available for 1975 as a whole indicate an export volume of 20.65 billion (1970 dollars) when export value is deflated by the June export price index. Complete 1975 data are not yet available for Germany and Japan.

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fell sharply to 2.5 at the end of the fourth quarter, reflecting both the gradual decline in unfilled orders and the strong growth of shipments.

The major factor contributing to last year's decline in unfilled export orders was the recession in domestic investment expenditure, which relieved the strains on productive capacity in the machinery sector, While foreign orders continued to rise, reflecting the developments outlined in Sections 1 and 2 above, new domestic orders for machinery dropped substantially. The backlog of unfilled domestic orders was run down along with the backlog of unfilled export orders, but not rapidly enough to prevent a decline in production for domestic customers. As a result, the industrial production index for machinery fell by 17 per cent from its peak in the third quarter of 1974 to its trough in the second quarter of 1975, before beginning to pick up slowly in the second half of last year.

This stimulus to production for exports is likely to be shortlived, however, primarily because technological considerations impose a limit on the minimal time lag between the receipt of new orders and the availability of output produced to order. The backlog of unfilled export orders was still declining month-to-month at the end of 1975, but this backlog had been worked down to only 2.5 month's worth of export shipments (or 2.6 month's worth of new export orders), 26 per cent below

the average ratio of 3.4 for the 1969-1972 period.

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4, The Composition of the Growth of U.S. Machinery Exports during 1975

Data available for the first three quarters of 1975 indicate that exports of electric machinery were 8 per cent greater in value in this period than during the first nine months of 1974, while exports of non-electric machinery were 29 per cent greater. A complete breakdown of non-electric machinery into 3-digit subgroups is shown in Table 6. The second column shows that roughly 70 per cent of the change in the value of non-electric machinery exports occurred in power generating machinery (SITC 711), agricultural machinery (SITC 712) and construction, excavating, and mining machinery (category "***", a major sub-group of SITC groups 718 and 719).

Table 6 also shows volume data, which have been constructed by deflating the January-September value data with appropriate BLS export price indexes for June (1974 and 1975). Roughly 30 per cent of the growth in non-electric machinery exports in 1975 was due to higher volumes, Agricultural machinery, metal working machinery, and construction, excavating, and mining machinery show volume growths of about 30 per cent and price rises of approximately 20 per cent, while power generating machinery shows 5 per cent volume growth and 20 per cent price expansion.

The three major growth categories, as well as the totals for non-electric and electric machinery, are broken down by area in Table 7. Over half of the increase in non-electric machinery exports was shipped to developing areas. This increase was split fairly evenly between OPEC and non-OPEC countries, with Latin America accounting for nearly 60 per cent of the additional non-OPEC purchases. Forty per cent of

the increased shipments to developing countries were exports of con-

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struction, excavating and mining equipment; but developing countries also increased substantially their purchases of power generating equipment and agricultural machinery.

Exports to industrial areas expanded most strongly in construction, excavation, and mining equipment, though Canadian purchases ofagricultural machinery also rose sharply. Despite receding investment expenditures in foreign industrial countries, the only area to reduce its purchases of U.S. machinery was Japan, The strength of exports to other industrial areas can be explained in part by the increased priority being given to investments in energy production and conservation, and in part by the relatively long delivery lags (as much as a year or more) on some orders for machimwry. Part of last year's shipments reflected orders that had been placed in 1974 -- and possibly even earlier -- when capital outlays abroad had been considerably stronger then they were in 1975, and when the industries accepting these orders had been experiencing production bottlenecks.

5. The Outlook for U.S. Machinery Exports in 1976

Despite the upturns in economic activity abroad, we foresee a slowdown in the growth of U.S. machinery exports in 1976. Five. factors underlie this outlook,

First, both the volume and value of new export orders for machinery have remained fairly stable since last June, probably reflecting the decline in investment expenditures in foreign industrial

countries in 1975, The flattening of these orders suggests little

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growth in machinery exports for several months to come; in fact, export shipments actually may decline if the gradual rundown in unfilled orders is halted,

Second, while industrial production is expected to pick up abroad, recent investment intention surveys predict that capital outlays in most foreign industrial countries will continue to decline, though not as steeply as last year.

Third, the OPEC countries as a group may be approaching the limits of their physical and financial abilities to absorb further large increases in imports, and mounting financial problems probably will lead non-OPEC developing countries to curtail their imports.

Fourth, while U.S.price competitiveness is still strong relative to its position six years ago, U.S. machinery export prices are no longer declining relative to foreign prices. The long-run improvement in the U.S. competitive position may continue to stimulate the volume of U.S, machinery exports, though the more recent deterioration in price competitiveness could eventually offset such gains.

Finally, with the recent and projected slowing of inflation in the United States, price increases will be less important in

stimulating the value of machinery exports than they were in 1975.

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Data Sources 1. Export Price Indexes

(a) U.S. export price indexes for 4 and 5-digit SITC categories of machinery are taken from quarterly news releases by the Division of International Prices of the Bureau of Labor Statistics, U.S, Department of Labor, These data, which cover roughly 55 per cent of U.S. machinery exports, are available for June of each year since 1970, and for March, June, September and December since 1974. Our ageregate price index for U.S. machinery exports is a weighted average of those price indexes which are available since 1970 for mutually=exclusive 4 or 5-digit SITC categories, with weights equal to shares in the value of 1973 exports.

(b) German export price indexes are taken from Preise Lohne Wirtschaftsrechnungen Reihe 1: Preise and Presisindices fur Aussenhandelsguter (Statistiches Bundesamt Weisbaden, 1974 annual and 1975 monthly editions)

(c) Japanese export prices indexes are taken from Price Indexes Annual (Bank of Japan, 1974 edition) and Economic Statistics Monthly (Bank of Japan, November 1975).

Tne machinery categories whose prices are described in Table 2 have the following representations in the U.S., German and Japanese data.

1.) U.S.: Internal Combustion Engines Other Than for

Aircraft (SITC 711.5); Germany, Internal Combustion Engines

t for Motor Vehicles and Motorcycles (Verbrennungsmotoren fur

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Kraftwagen und Kraftrader) ; Japan: Engines (Internal Combustion) 2.) U.S.: Agricultural Machinery and Appliances for Preparing and Cultivating the Soil (SITC 712.1); Germany: Soil Tilling Equipment (Ackerschlepper); Japan: Agricultural Machinery: Power Tiller 3.) U.S.: Calculating Machines, Accounting Machines and Similar Machines Incorporating a Calculating Device (SITC 714.2); Germany: Adding and Calculating and Accounting Machines (Rechen and Buchungsmachinen); Japan: Electronic Calculating Machines, Table Type 4.) U.S.: Machine Tools for Working Metals (SITC 715.1); Germany: Metalworking Machinery (Metalbearbeitungsmachinen) ; Japan: Metalworking Machinery 5.) U.S.: Pumps, Excluding Centrifuges (SITC 719.2 excl. 719.23); Germany: Pumps and Compression Equipment (Pumpen and Druckluftgerate und dgl.); Japan: Pumps and Similar Products 6.) U.S.: Forklift Trucks (SITC 719,32); Germany: Cranes and Lifting Gear (Krane und Hebezeuge); Japan: Forklift Trucks.

2. Export Value Data (a) U.S. machinery export values (and unit values) are taken from Survey of Current Business, (various issues), and data obtained directly from the Bureau of International Commerce. (b) German and Japanese Machinery export value data (SITC #71

and #72) for 1970-1974 are taken from OECD Statistics of Foreign

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Trade, Trade by Commodities Country Summaries, (OECD, Series B, annual Jan.-Dec. 1973-74), --(c) German’and Japanese machinery export value updates for

1975 are from‘national sources:

-~- Aussenhandel, Reihel, Zusammefassende Ubersichten

(Statistiches Bundesamt, Wiesbaden, October 1975), and

-- Economic Statistics Monthly (Bank of Japan, November 1975). -(d) World trade data are from International Financial Statistics (IMF, January 1976), 3. Exchange rate data are from Federal Reserve Bulletin (FRB, various

issues 1971-1975).

4. U.S. machinery orders data are from the Survey of Current Business (various issues) for total orders, and from "Manufacturers' Export

Sales and Orders of Durable Goods," Bureau of the Census, Department

of Commerce (monthly). for-export orders.