Sunday, June 29, 2008

Foreign tourists in Boston are helping to keep the U.S. out of recession

As I have told you all, I am an economist in the financial services industry and I work in the Back Bay; specifically, I work in the Prudential center. Two days ago, I took a run around the Charles river and noticed a German family that was visiting Boston (bottom photo). I stopped and spoke with them using my broken German, asking if I could take their photo to post on my blog. After I finished my run, and on my walk home, I saw a Swiss mother and son duo (top photo). Before I knew that they were foreign, I noticed that they were walking around with many shopping bags; specifically, she had a striped Rugby bag from the Ralph Lauren store at Copley Plaza. I stopped and spoke with them, and they allowed me to take their photo as well. These international tourists are pushing up export income, which is keeping the economy afloat.
The U.S. has suffered through unprecedented shocks to the housing, financial, and energy markets. We are in troubling economic times, and it is remarkable that the economy is growing at all. In fact, the Bureau of Economic Analysis estimates that the economy is growing at a rate of 1.0% per year. One primary reason that the U.S. is able to stay afloat is international tourism and export income.
A bit on the economics of foreign trade
Foreign exchange can be a bit tricky to understand, but all in all, if a foreign currency gains strength (appreciates) against the U.S. dollar, then if nothing else changes, U.S. goods become cheaper. Foreign economies will purchase more of our goods: agriculture, electronics, banking services, real estate, restaurant meals, clothing, and really anything that you can think of. These goods that are made in the good old US of A and shipped to a foreign economy are called exports. We like exports. More exports, more income, and higher U.S. economic growth.
Many countries target exports as the primary driver of economic growth. China, Japan, India, Malaysia, Singapore, and many other economies across the globe grow by focusing their production efforts for sale to foreign economies like the U.S. So much so, that many are coupled to the U.S. That is where the current account comes in. A U.S. current account deficit (negative value) is the method by which the U.S. satisfies its insatiable hunger for foreign goods. We take out loans (sell government bonds) in order to buy more goods today, but we must pay interest on the loans that we secure. So, as the U.S. takes out loans in order to buy more and more foreign goods, our interest payments rise, and a current account deficits result.
Phrases often used to describe the U.S. international balance of payments (flows of goods and services, and flows of investments across borders): perpetually negative current account balance (current account deficits) and exports shipments that are much smaller than what we buy from foreigners (imports). However, recently the U.S. dollar has been losing value and the following are happening: the current account balance is rising, and exports are rising. Both are good for economic growth.
Enough on the economics of foreign trade
I will stop boring you with the economic technicalities of the international balance of payments accounts, but we did need the terminology.
The photos of these two international families show exports in action. The two families visit the U.S. because it is cheap for them to do so. The figure below shows that both currencies, the Swiss franc and the Eurozone Euro (German currency), are gaining strength against the U.S. dollar. It becomes extremely affordable for the Germans and Swiss to visit the U.S., and more importantly, spend their money here. When they spend their money – no matter what they buy – they are contributing to U.S. export growth.
Keep the exports flowing because America is struggling. Home values are plummeting, financial wealth is tumbling, floods in the Midwest are devastating, and on top of that, employment is falling. We need all of the help that we can get, and I for one am willing to take it from the Germans or the Swiss.
So, next time you are walking through your city, Denver, New York, San Francisco, Portland, or wherever you live, encourage the foreign tourists to spend more. Be nice to them – they are keeping the U.S. from entering a recession.

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