Oregon Office of Economic Analysis

New research out of the Federal Reserve Bank of Dallas (HT: Oregon Economics) creates, discusses and highlights state specific trade-weighted dollar indexes. A dollar index serves many purposes, however it generally acts as an indicator of international competitiveness for exports and can be used as a leading indicator in terms of employment in trade-dependent locales. The major issue has been that no one produced state level indexes for all the states, however the Dallas Fed is just beginning to fill that void (the data will begin being published in March 2011) and will be a useful measure for economists, researchers and import/exporters everywhere. While no one produced these indexes for all states, our office has been producing an Oregon specific trade-weighted dollar index for the past couple of years and incorporate it into our office’s Oregon Index of Leading Indicators. What follows is a brief look into how our index is constructed and how it compares with the major currency dollar index produced by the Federal Reserve.

Given Oregon’s industrial makeup (the state’s manufacturing location quotient for 2009 was 1.143, with durable goods registering a 1.309) and geographic location, the state has long been a major exporter and international trade is a pillar of the state’s economy. According to research, Oregon is the fifth most trade-dependent state in the U.S. and a recent Brookings Institute report (see page 15) shows that the Portland-Vancouver MSA is the second most trade-dependent metro in the country behind only Wichita, KS. (Wichita is the “Air Capital of the World” and has long been a major player in the aircraft industry with operations by Boeing, Airbus, Leerjet and Cessna, among others.) Seeing that exports play a major role in Oregon’s economy and international trade is influenced by exchange rates, tracking the international competitiveness of Oregon’s exports is important to determine the economic health of the state and also to help gauge future trends. It also stands to reason that for a trade-dependent state, such as Oregon, a dollar index is a leading indicator for local employment. As the dollar becomes more competitive, it will boost Oregon exports, which in turn will lead to increased employment as the exporting firms need to hire additional workers to fill orders and the ports will hire additional workers to load/unload the products onto ships, barges and airplanes.

Generally speaking, what the Dallas Fed is now undertaking follows the methodology of our office’s Oregon dollar index, however there are a few differences that lead to slightly different outcomes. First, the graph below illustrates our office’s Oregon dollar index and the Major Currency dollar index from the Federal Reserve over the past 15 years. As noted in the Dallas Fed article, the first item to notice is the large appreciation (strengthening) of the dollar in 1997 for Oregon. This is due to the Asian Financial Crisis, which affected many of Oregon’s major trading partners along the Pacific Rim. These trading partners devalued their currencies in the wake of the crisis, resulting in a strong dollar for Oregon.

Other than the Asian Financial Crisis, the Oregon dollar index and Federal Reserve dollar index generally exhibit the same pattern of time as the dollar depreciated during the 2000s against most currencies, only to surge during the recent financial crisis as investors viewed, and used, the dollar as a safe haven. If one directly compares the graph above with the graph produced by the Dallas Fed that includes the Oregon measure, the primary difference appears to be the 1995-1997 time period, just prior to the Asian Financial Crisis. Noted in the Dallas Fed research is the fact that their index is based on the Top 25 trading partners for each state and is weighted based on the average percentage of trade with each country over the 1997-2008 period. Our office’s index is based on the Top 15 trading partners and the weights applied to each currency change every year based on the most recent trading patterns (percentages). As shown below, the changes in currency weights can and should differ from year to year as the economic landscape changes, especially for Oregon. Among the Top 15 export destinations during the mid-1990s, Oregon exported over 25 percent of the total to Japan, while China accounted for less than 1 percent. Today, Japan’s share has fallen to approximately 10 percent, while China’s has risen to nearly 24 percent. Such changes over time are important to follow and incorporate into, essentially, an international competitiveness measure.

The fact that the Dallas Fed uses the Top 25 trading partner countries and our office uses just the Top 15 countries may seem like a potentially large difference, however, based on data over the past 15 years, it is not. On average, the Dallas Fed notes that their indexes cover 89 percent of all exports for each state. That means, the Top 25 trading partners account for 89 percent of each states’ exports. In Oregon, the Top 15 trading partners account for an average of 84 percent of all exports and depending upon the year, the exact percentage falls within the 82-88 percent range. With such a small difference between using the Top 15 compared to the Top 25, the overall dollar index for the state would not be changed significantly.

Overall, the continued depreciation of the U.S. dollar and also the Oregon Dollar Index, is good news for exports (and manufacturers of export goods), which should continue to increase as the global expansion continues. For a more in-depth look at Oregon exports see this previous post and also the International Review and Outlook section of our office’s quarterly forecast.