What would we do without Brad Setser to give us a hard, analytical look at trade and international funds flows? Setser tells us that the headline news on the trade deficit, namely, that it shrank in March, is misleading. When you dig deeper, and in particular pull out petroleum-related flows, it reveals that real export growth is stalling, which is not good at all, given the supposedly weak dollar.
You’d never detect that worrisome pattern from the mainstream press. It treated the trade release as entirely good news, as the Wall Street Journal illustrates:
U.S. trade deficit narrowed more than expected in March as imports of cars and crude oil dropped amid record-high oil prices and a weak economy.
The March deficit was smaller than Wall Street expectations. Economists surveyed by Dow Jones Newswires had estimated a $61.50 billion shortfall.
The decrease in the trade gap followed two straight months of widening deficits, and suggests that trade contributed more to first-quarter gross domestic product than initially estimated.
The Journal’s Economics Blog, with the headline “Economists React: ‘Huge Support’ From Trade” had the experts giving a similarly upbeat reading. Some examples:
The trade balance improved in March despite a sharp spike in oil prices. Non-oil imports fell much more substantially than exports declined. On a trend basis, imports have been slowing while exports continue to climb, boosted by the weak dollar. The trend changed in 2007 with exports now growing more strongly than imports. This has reduced the trade deficit from its record 2006 level. However, because imports are still more than 40% larger than exports and oil prices are continuing to climb, progress on narrowing the trade deficit has been slow and irregular. –Steven A. Wood, Insight Economics
Trade continues to be a huge support for the U.S. economy. Export demand is holding up well, despite the setback in March, which was mostly due to a temporary drop in aircraft. Meanwhile, much of the slowdown in U.S. domestic spending is being passed on to the rest of the world through lower imports. Global Insight anticipates that U.S. domestic demand will rise only 0.3% this year, but that GDP will rise 1.2% due to improved net exports. –Nigel Gault, Global Insight
Note that the more cautious and nuanced comments came later in that post.
Setser, by contrast, said that there “wasn’t much to like” in the March report. Ouch. A lot of experts had hoped that the falling dollar would cushion the blow of a weakening economy via more robust exports. And while commodity producers and manufacturers are doing well, we now live in a service economy. Even if the dollar weakens further, the US has sent much of its manufacturing abroad, and we now lack skilled workers and relevant equipment. How long would it take, say, to increase furniture manufacture here (my ex-Ethan Allen sources say there was no inherent reason the US could not have remained competitive in high end furniture production). Who would be willing to bet the dollar will remain cheap long enough for that sort of investment to pay off?
Yes, the headline deficit fell relative to February, but February looks to have been a blip. The rolling 3m deficit has been stable at around $59.5b since December. And much of the fall in the deficit came from a big fall in the volume of imported petroleum. Petrol imports (in volume terms) were running ahead of last year’s pace in January and February. March brought the year to date total down below last year’s total, as the volume of imported crude was about 15% lower than the volume of imported crude last March. The fall in volume was large enough to offset a rise in price. The price of imported crude jumped from $84.76 to $89.85, but the seasonally adjusted US petrol import bill still fell by $2.2b, from $37.4b to $35.2b.
The real problem though was on the export side. Export growth looks to be slowing. The headline nominal growth numbers look good…..But if the rise in agricultural exports and exports of industrial supplies (petrol, chemicals, metals) is stripped out, export growth was only up 5.2% in nominal terms. That is a warning sign.
A plot of real goods exports and imports shows a small monthly fall in exports in March.*
The data bounces around a lot, but it certainly seems that the pace of growth in real US goods exports is slowing. March real goods exports fell back below their level last June (see Exhibit 10). …..
Interjection: the gap between the 5.2% nominal increase versus the real decline also suggests manufacturers are increasing margins rather than seeking to use the price advantage to gain market share.
Dollar depreciation helps, but a slowing world economy hurts. Countries that are spending more on oil may have a bit less to spend on other goods. Plus, in some sectors the US may be hitting capacity constraints …
The improvement in the nominal trade balance – plotted on a rolling 12m basis* – also has stalled.
It isn’t hard to see why: oil
And there is more bad news in the pipeline. Project out $89 a barrel oil for the remainder of the year and the oil balance deteriorates by over $100 billion in 2008. Project out $110 a barrel oil and the oil balance deteriorates by over $200 billion in 2008. The average price of imported oil in q1 of 07 was only $52 a barrel; the average price for all of 2007 was only $64.27 a barrel. That calculation, by the way, assumes that the volume of petrol the US imports continues to fall slowly.
One other point:
The improvement in the US trade balance with China (the deficit was $2.2 billion smaller in q1 2008 than in q1 2007) comes far more from the fact that US imports from China have essentially stopped growing.
Brad, re China, it might be also be the toxic toys and heparin. It’s anecdotal, but my suburban buddies told me no one bought toys for their kids this Christmas. Instead, it was electronic games, DVDs, bikes, sporting equipment, anything but. I’m avoiding scallops and tilapia, both of which are imported heavily from China and are chock full of pollutants.
I have been waiting for just this number, and was unsurprised that Brad Setser was on top of the issue. As I rather suspected, there is much less to the ‘Export-led Recovery’ than meets the eye: we are, fundamentally, exporting commodities, both agriculturals, and refined products like chemicals and petrochemicals. Finished manufactures are not rising at a rate which will in any way address our long-term BoP issues. We need to take a long look in the mirror as a country, swear of the sauce, and come up with a national economic policy; like, yesterday.
Yves — Thanks for the compliment. My first job at the US Treasury involved tracking the trade data (among other things), so also thank the US taxpayer. I agree with your point on toxic toys and Heparin — clearly, I need to spend more time in the ‘burbs. A few additional points.
a) the 5.2% y/y increase in nominal non-ag, non-industrial supplies exports (comparing q1 08 to q1 07) really shouldn’t be compared with the monthly fall. A better comparison would be with the y/y increase in real goods exports from q1 07 to q1 08 (I’ll dig up that number later) — or even better, real goods ex ag and ex industrial supplies on a y/y basis. I suspect there has been some volume increase as there was a big jump in volumes in q2 and q3 of last year. I should have been a bit clearer on this.
b) some of the march down blip is planes; the street is right to highlight the $1.5b fall in Boeing deliveries abroad. aircraft can drive fairly large swings in the monthly export number. But I suspect that if you compare q4 real goods exports to q1 real goods exports they will be close to flat. that is the underlying worry. the pace of growth in civil aircraft exports also has slowed (tho they are up y/y) i think because of capacity constraints.
c) I should look at the real volume data for ag and industrial supplies. the “ports clogged” stories suggest some growth in volumes not just values, but part of that may be due to the fall in incoming containers. lots more containers are now going to the Gulf and Europe with ASian goods these days than in the past.
d) net exports could still contribute positively to growth in a mechanical sense if real imports fall and real exports stall. basically, us suppliers would be taking some of the pain of the slowdown in US consumption (non-oil consumption) reducing the hit to US activity. But that isn’t quite as nice a story as booming exports.
I’ve also been worrying about polluted food. In 2006 I stopped buying fruit and vegetables from China and when garbage was piling up in the streets of Naples I heard that area is one of the worst polluted in western Europe with high incidences of cancer. That convinced me to stop buying Italian except when it’s clearly stated that the consumables come from another region of Italy.
Yves — it turns out your compliment was premature at best; there was a small error in my post. q1 08/ q1 07 Non-ag non-industrial supply growth was 8.8% — not 5.2% as I initially wrote. A calculating error on my part. Volume growth on the same measure was 8.2%. That looks good — not much margin expansion.
The problem is that q4/q1 and q4/q3 data suggest real export growth (annualized) is running at 3-4% now, so a much slower pace than earlier in the year. the fact real goods export growth has been slow for 2qs suggests to me that it isn’t just a monthly boeing blip.
Boeing Co. and Machinists union representatives met Friday to open contract talks, exchanging proposals on pay, pensions, health care and other issues.
With the ripoff Bernankie is passing out to American workers I doubt if Boeing will be making many planes when these guys go on strike.
Re: “You’d never detect that worrisome pattern from the mainstream press. “
It is great to see blogs like yours making headroads into the mainstream distribution of info. This is a big part of the future, in that people like you and this type of blog are needed to cut thru the crap that is being spun by corporate spinners that want a political agenda bias that is false and misleading!
Keep up the great job and may you prosper!
I’m going to start using Mainstream links less often!