In May, the U.S. trade deficit fell to $26.0 billion from 28.8 billion in April, a decline of $2.8 billion. For a change, the principal reason for the decline was both a rise in exports — which rose by $1.9 billion — as well as a fall in imports — which declined by $0.9 billion.
Most of the previous (and remarkable) decline over the past year or so has been do to imports falling much faster than exports.True, as the graph below (from http://www.calculatedriskblog.com/) shows, a big part of the decline in imports has been due to a shrinking oil bill. This is both due to lower prices (oil prices peaked out about $145/barrel a year ago) and due to lower consumption.
The improvement in the non oil part of the trade deficit, shown in red on the graph, started earlier (late 2005) and has been remarkable in its own right. Until a year ago, the progress on that front was obscured by the huge oil portion of the trade deficit (shown in black on the graph). Oil is part of a larger category of industrial supplies and materials, our exports of those were up by $2.1 billion while our imports of them fell by $0.7 billion. In other words, the entire change in the overall trade balance can be accounted for in the change of the trade balance in industrial goods and materials.
However, for the month, the story was not all about oil, since while oil prices were down on a year-over-year basis, they were higher in May than in April, and the increase in our exports of industrial goods and materials was a bigger factor in the decline in our imports. This can be seen in the regional trade deficit numbers.
For the month, our deficit actually expanded with OPEC to $4.1 billion from $3.6 billion. Most of the improvement in the overall trade deficit numbers came from a sharply reduced deficit with the European Union ($2.8 billion vs. $5.3 billion in April) and with Japan ($1.9 billion versus $3.2 billion).
Our trade deficit with China actually widened to $17.5 billion from $16.8 billion. As a percentage of the overall trade deficit, that is a pretty astounding 67.3%, up from 57.3%. A year ago the trade deficit with China was $21.4 billion, so we have brought it down significantly on an absolute basis, mostly because we are buying less stuff from them at Wal-Mart (WMT) and Target (TGT). However, as a percentage of the overall trade deficit, China has soared from “just” 35.3% a year ago.
Relative to a year ago, the overall trade deficit is down by $34.6 billion, or 57.1%. However, this has been achieved through a $67.9 billon, or 31.1% decline in imports and a $33.3 billion decline in exports. While as a matter of National Income Accounting (what goes into GDP) that does not make much of a difference, in the real world of creating jobs and producing profits for investors it makes all the difference in the world.
Yes, it is nice to see imports decline, particularly things like oil imports, but it would be far better if we were reducing the deficit by selling more abroad, rather than buying less here. If there were some evidence that the reason for the reduced imports was that we were making more of what we consume here, say by buying Chevys built in Detroit rather than Hondas built in Tokyo (or Hondas build in Tennessee, for that matter), it might be a different story.
However, it appears that the reduction in imports is just another reflection of weak overall demand. The change in the balance of industrial goods and materials (including oil) was a very significant part of the year over year improvement, with our monthly import bill falling by 34.9 billion while our monthly exports were down by $11.0 billion. In other words, this category was responsible for $23.9 billion — or 72.6% — of the total improvement on a year-over-year basis.
Net imports (aka the trade deficit) is a direct input into the GDP numbers. The improvement in the May trade deficit will be an important factor in making the second quarter GDP growth decline much less than the 5.5% decline we saw in the first quarter. Since our exports are by definition the imports of some other country, the fact that demand for them is rising might indicate that the rest of the world is also starting to find its economic footing (although it would show up as a negative in their national income accounts, just as it helps ours).
I find the rise in actual exports to be a very encouraging sign. It might just be signaling some light at the end of the tunnel for major U.S. exporters like Boeing (BA), Caterpillar (CAT) and Microsoft (MSFT).
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