The trade deficit for November widened to $36.4 billion from $33.2 billion in October. The October number was revised from $32.9 billion.
However, we are still doing better on the trade deficit front than a year ago, when the gap was $43.2 billion. Last year, though, the trade deficit was collapsing as both imports and exports were tumbling in response to the financial crisis. The trade imbalance had hit a peak of $64.9 billion in July of 2008, and it was on its way to a low of $25.8 billion in May of 2009, and it has been rebounding ever since.
The Good News?
The good news is that the trade deficit is increasing for the “right reason” — with imports increasing faster than imports — but both are still on the increase. Our exports increased by 0.9% to $138.2 billion from $137.0 billion in October (revised up from $136.8 billion), but are still 2.3% below year-ago levels. Our imports, however, increased to $174.6 billion from $170.2 billion, a 2.3% increase.
Our imports for October were revised up from $168.8 billion. Still, our imports are 5.5% below year-ago levels. For the first 11 months of 2009, the trade deficit (census basis) totaled $450.9 billion, down from $764.3 billion for the first 11 months of 2008.
So What’s the “Wrong Reason”?
The collapse came for the “wrong reason” — with both imports and exports falling, but imports falling faster. Since the U.S. is the largest economy in the world, if both sides are falling here, it means that world trade is in trouble.
Still, it is hard to see an increase in the trade deficit — particularly one that is much larger than expected ($34.6 consensus expectations) — as being good news. For starters, it is a direct drag on GDP growth, as the (X-M) part of the famous GDP equation (GDP = C + I + G + (X – M).
The trade deficit is also what drives our foreign indebtedness, not our budget deficit. If you are worried about how much money we owe to China, worry first about the trade deficit, not about the budget deficit (there are other reasons to worry about budget deficits). If we ever want to have a more balanced economy, one where consumption comes back down to a more normal level of the total (say about 65% of GDP rather than the record-high 71%), we will have to get the net export part of the picture under control.
Can We Get Net Exports Under Control?
Doing so is not going to be an easy task. For starters, the deficit with China totaled $20.2 billion. While that is down from $22.7 billion in October, it still represents 55.5% of the total trade deficit. Normally, the best way for a country to get rid of a chronic trade deficit is to let its currency fall, which makes imports more expensive and exports more competitive. That medicine will not work with China, since it pegs the Yuan to the Dollar. A weak dollar simply makes China more competitive in selling stuff to Europe and Japan.
While our deficit shrank with China for the month, it increased with most of our other major trading partners. Our deficit with the European Union expanded to $6.4 billion from $4.9 billion in October, and to $5.4 billion with Japan from $4.4 billion last month.
How Petroleum Affects the Big Picture
Energy is a big part of the problem, as our deficit with OPEC increased to $6.1 billion from $5.8 billion. While Nigeria and Venezuela were members of OPEC last time I looked, the Census Bureau lists them separately. Together the deficit with those countries rose to $3.7 billion from $3.1 billion.
The graph below (from http://www.calculatedriskblog.com/) breaks down the total trade deficit (blue line) into petroleum (black line) and non-petroleum (red line). We actually started to see a very significant recovery on the non-petroleum side of the trade deficit starting all the way back in mid-2005. That was masked by soaring oil prices that continued to sharply increase the petroleum side. The net result was sort of a stand-off that lasted for three years, as we regularly ran deficits of around $60 billion a month. Those add up — even in an economy of about $14 billion a year.
It was not until the financial crisis caused the price of oil to plunge that we made any significant progress on the overall trade deficit. Now with oil prices rebounding, the trade deficit is taking a turn for the worse.
As For the Non-Petroleum Side…
The non-petroleum side has also taken a turn for the worse in recent months. In November, the goods deficit was $19.9 billion for petroleum, up from $17.8 billion in October, and actually above the $19.8 billion level of a year ago. The non-petroleum side increased to $27.1 billion from $25.6 billion, but is comfortably below the $32.7 billion level of a year ago.
Yes, the sum of the petro and non-petro side is well above the total trade deficit; that is because we regularly run a surplus in services. Year to date, the petroleum deficit is $180.8 billion — down from $367.2 billion for the first 11 months of 2008, a 50.7% decline. The non-petro deficit was $270.2 billion for the first 11 months of 2009, a 32.% decline from the first 11 months of 2008.
2 Things to Happen to Improve Our Trade Deficit
Thus, for us to really make progress on curing the chronic trade deficit problem we have, 2 things need to happen: The first is that China needs to start letting its currency appreciate. This would actually be very good for the ordinary Chinese, who could afford many more foreign goods if it were to happen. It would also be great for investors who own Chinese stocks like China Mobile (CHL) or ETFs like the Claymore China Small Cap (HAO), especially those that get most of their revenues from inside China itself.
The second thing that needs to happen is that the U.S. has to cure its addition to foreign oil. While U.S. reserves of oil are mostly already depleted, we have lots and lots of natural gas from the shale plays. In the short term, it is hard to substitute natural gas for oil, particularly as a transportation fuel. The problem stems mostly from the lack of an installed infrastructure for refueling vehicles with natural gas, but that is certainly not an insurmountable problem (mostly adding compressors; we have natural gas pipelines running through most of the country).
Technically it is not hard to build a car that runs on natural gas. There would also be substantial environmental benefits from doing this, as gas produces fall less CO2 per amount of energy than does oil (and oil much less so than coal), not to mention being almost entirely free of other pollutants.
Efforts to improve overall energy efficiency are also vital to solving the trade deficit problem. Alternative energy sources also have a role, but in the intermediate term, use of natural gas and efficiency programs would have more impact. If we were to go down that path, the obvious beneficiaries would be natural gas producers like EnCana (ECA) and also pipeline firms like Energy Transfer Partners (ETP).
A weak dollar will help get the trade deficit under control, but it is not a silver bullet — given the China peg and how the price of oil is likely to increase in response to a weak dollar — but it will help. Even in China where the currency is pegged, if the dollar is weak, we can snag some orders that might otherwise go to Japan or Europe.
This Is Serious Stuff, Folks
The trade deficit is a slow motion train wreck that will eventually destroy the country, just like increasing your credit card balance by $100 a month will eventually lead you into poverty. Even if it was caused by the wrong reason, the sharp drop in the trade deficit was one of the few major silver linings of the financial crisis of a year ago.
We simply cannot afford to go back to the days when we were running $60-billion-a-month trade gaps. We need to eventually get to the point where we are running a trade surplus. That would help solve a host of economic problems here.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service.
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