There was both good news and bad news in the Trade Report. The good news is that the contraction in U.S. international trade appears to be over. In June, exports rose by $2.4 billion to $125.8 billion, an increase of 1.4%. Meanwhile imports rose by $3.5 billion to $152.8 billion, an increase of 2.3%.
That, of course, is also the bad news — since imports are both bigger and rising by a bigger percentage than exports, it means that the trade deficit increased. In June, the deficit was up by $1.0 billion to $27.0, an increase of 3.8%. As is shown in the graph below (from http://www.calculatedriskblog.com/), the principal culprit was the increased price of oil. The non-oil deficit continued to contract.
The increase in the trade deficit in June reverses a remarkably positive trend in the deficit over the last year. Granted, the causes of the improvement was from imports falling faster than exports, rather than from increases in both, but for national income accounting that does not make a difference. In the real world it does, since the lower imports are a refection of lower overall demand here and the lower exports are a refection of lower demand overseas.
If the reduction in imports were happening because of import substitution — people buying a Ford (F) built in Detroit rather than a Honda (HMC) made in Tokyo — that would be different. Since last year, our imports have fallen by $69.0 billion (that’s per month), or 31.1%. Over the same period, our exports are down “only” $35.8 billion, or 22.2%.
Still that means that the trade deficit is down by $32.2 billion, or 54.4%. The improvement in net exports was one of the key factors in the better-than-expected GDP report we got a few weeks ago.
Oil was a key factor in both the year-over-year improvement and in the reversal in June. With gasoline consumption still down, the reason was price, not volumes. There is a little bit of a lag between the price of oil quoted on the exchanges and the price of oil in the import and export figures (this has to do with the timing of when it is bought and shipped; super-tankers are not exactly speedboats).
The average price of imported oil was $59.17 in June, while back in the winter we were paying more like $40 a barrel. With the price of oil currently hovering around $70, look for the oil portion of the trade deficit to continue to rise in July and August.
The other side to the trade deficit, as a matter of accounting identity, is the capital account surplus. Every dollar of the trade deficit is offset by foreigners holding an extra dollar, which is then usually invested back in the U.S.
The most prominent example of this is the massive build up of reserves by the Chinese, who now own an estimated $1 trillion of Treasury securities. If the trade deficit is falling, it means that we have less need to import dollars to finance the economy.
However, the year-over-year drop in the trade deficit has coincided with a huge increase in the government budget deficit. So how is that possible? The answer is the big increase in the savings rate, from near zero to over 5% at just the same time that the trade deficit has plunged.
In effect, we are getting back to the way it was in the old days. Then, when the government ran a deficit, we just owed the money to ourselves, since Americans were the bondholders. However, while the river of financing (the deficits) is starting to become more domestic, the massive lake of financing (the debt) is still very much dominated by foreigners, most notably the Chinese, Japanese and OPEC.
For the world economy, it is very encouraging to see the volume of trade actually expand. The contraction of trade has been one of the key factors/symptoms in the worldwide economic downturn. While this is only one month’s data from one country (albeit a pretty important one to the world economy), it is a hopeful sign. It would be even better if it had happened with a bigger increase in our exports than imports.
The large U.S. trade deficit is one of the biggest structural imbalances in the world economy, and over time has to come down, and hopefully reverse. However, for a healthy economy, that has to be in the context of expanding, not contracting world trade. So the trade report is really one of those where it has it half right, and people are free to see it as either the glass half full or half empty.
Read the full analyst report on “F”
Read the full analyst report on “HMC”
Zacks Investment Research
