U.S. Exporters Face Harsh Climate - May 2, 2005

Sluggish Growth AbroadSqueezes Manufacturers;Canada Hits 'Weak Patch'
By TIMOTHY AEPPEL Staff Reporter of THE WALL STREET JOURNAL
Slower economic growth in parts of the world is translating into fewer exports for many U.S. manufacturers, who had counted on strong foreign sales to help fuel expansion.
The problem is linked mainly to Europe's and Japan's sluggish growth, which is curbing the appetite for U.S.-made goods in those regions. But Canada is a concern, too. U.S. exports of goods and services grew 7% in the first quarter, according to the Commerce Department, up from 3.2% the quarter before. However, export growth was stronger in the early part of last year and then moderated sharply. As a result, most economists are predicting export growth for all of 2005 will fall well short of last year's overall performance.
Cliff Waldman, an economist at the Manufacturers Alliance/MAPI, an Arlington, Va., group that represents large manufacturers, recently cut his projection for this year's export growth to 5.7% from 8% and cautioned that he sees "downside risks" in this area. He blames Europe and Japan but also has growing concerns about Canada, the U.S.'s largest trading partner. "Canada is entering a weak patch and it could turn into something worse," Mr. Waldman said.
Softer export growth is only one problem facing U.S. manufacturers. Rising energy prices have dragged U.S. economic growth to a two-year low. Since the bulk of what U.S. factories produce is sold domestically, that means fewer sales at home. U.S. gross domestic product, the broadest measure of all goods and services produced, rose at a disappointing 3.1% annual rate in the first quarter, down from 3.8% in the fourth quarter. Durable-goods orders fell 2.8% in March.
Slower export growth will make it that much tougher for the U.S. to rein in its trade deficit, though most economists say surging imports are the crux of that problem. Even rapidly growing exports are unlikely to make a dent in the deficit until the U.S. curbs explosive import growth. U.S. exports grew 8.6% last year.
The U.S. is increasingly an exporter of capital equipment, so weaker growth is hitting many equipment makers. Nordson Corp. of Westlake, Ohio, recently cut its revenue target for its fiscal second quarter, ended April 30, and for its full fiscal year, pointing to softer-than-expected international sales, particularly in Europe and Japan.
"World-wide demand for capital goods has decelerated," said Nicholas Pellecchia, the company's vice president of finance. Nordson makes machines that apply adhesives, sealants and coatings in factories, so it is highly sensitive to trends in business investment. Mr. Pellecchia said companies in Europe and elsewhere suddenly appeared to grow more cautious about investing around January. Demand in parts of Asia outside Japan has also moderated, though it remains robust, he said.
Mr. Pellecchia added, however, that Nordson sees "this more as a short-term issue of a...pause, rather than a longer-term structural issue." The company doesn't expect export growth to continue decelerating.
Another example is Rockwell Automation Inc. of Milwaukee. The maker of factory automation equipment says a "systematic slowdown" in Europe is hurting its exports. James Gelly, the company's chief financial officer, said that during Rockwell's fiscal second quarter, which ended March 31, business grew 33% in China, 57% in India, and 22% in Latin America, while Europe declined 1%. Germany, Europe's largest economy, was especially troubled, with a decline in the double-digits for the period.
Rockwell also believes export growth has slowed but will stabilize at a lower level. Based on the number of engineering studies under way -- the planning processes that precede major automation projects -- the company expects global strength stretching into 2006, Mr. Gelly said.
Richard DeKaser, chief economist with National City Corp. in Cleveland, said aggregate demand in the rest of the world simply isn't strong enough to pull in more U.S.-made goods. "That's been neutralizing the favorable effect of the declining dollar," he said.
Some companies continue to see surging export growth. Haas Automation Inc. of Oxnard, Calif., said its exports of machine tools to Europe have increased 40% so far this year. "Driving the growth, in part, is the favorable exchange rate," said John Roth, Haas's director of customer service. But the company has also expanded its sales and support efforts in foreign markets.
Write to Timothy Aeppel at timothy.aeppel@wsj.com