Trade Deficit Higher Than Expected - Analyst Blog

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The Trade Deficit rose in November to $47.75 billion from $43.27 billion. There was a small downward revision to the October deficit of $200 million. It was worse than the expected level of $44.0 billion.

This was a disappointing report. On a year-over-year basis, the total trade deficit was up by 24.5% from $38.84 billion. The trade balance has two major parts: trade in goods and trade in services. America's problem is always on the goods side; we actually routinely have a small surplus in services.

Relative to October, the goods deficit rose to $63.18 billion from $58.57 billion. Relative to a year ago, the goods deficit was up 20.3% from $52.50 billion. The Service surplus was up slightly from October to $15.43 billion from $15.30 billion. Relative to a year ago it is up 13.0% from $13.66 billion.

Exports fell for the second month in a row, which is not a good sign, but exports were quite strong earlier in the year. Exports of goods fell by $1.51 billion, or 1.18%, for the month to $126.56 billion. Relative to a year ago, goods exports are up 11.12%. In other words, we slipped below the pace to meet President Obama's goal of doubling exports of goods over five years.

On a year-to-date basis, goods exports are up 16.94%, above the pace needed to double over five years. Service exports were down slightly for the month to $51.28 billion, from $51.30 billion.  They are up 7.96% year over year, which is well short of the pace needed to double over five years (just under 15%). Total exports fell 0.85% for the month to $177.84 billion and are up 10.29% year over year, below the pace needed to double over five years. On a year-to-date basis, total exports are up 15.03%, slightly above the doubling pace.

Tracking Net Exports

Doubling exports over five years is all well and good, but not if we also double our imports over the same time frame. After all, it is net exports which are important to GDP growth, and to employment. For the month, total imports rose by 1.33%, and are up 12.75% year over year and by 14.29% on a year to date basis.

Relative to a year ago, goods imports were up by $23.45 billion, or by 14.10%. At that pace, they are slightly below the pace needed to double over five years. However, since they at starting from a higher base, the dollar increase, is much bigger than the $12.77 billion increase in goods exports.

In November we bought from abroad $1.499 worth of goods for every dollar of goods we sold, up from $1.457 in October, and up from $1.461 a year ago. Including services, we imported $1.268, up from $1.241 in October, and from $1.241 a year ago.

Trade in goods simply swamps trade in services, even though services are a much larger part of the overall economy. So far in 2011, the total trade deficit is up 11.58% from the first eleven months of 2010. The goods deficit is up 14.34%, offset by a 23.97% increase in the service surplus. Year to date our deficit with the rest of the world is $512.78 billion, up from $459.57 billion in the first eleven months of 2010.

All things being equal, it is better to see trade going up than down. Increasing trade tends to increase the size of the overall pie, but also tends to rearrange the size of the slices within a country. We want to see both exports and imports growing, but given the massive deficit we are running, we need to have exports rise dramatically faster than imports, or actually see imports fall. Thus I think, on balance, passing the free trade agreements with South Korea, Panama and Columbia was the right thing to do.

From a purely nationalistic point of view, rising exports or falling imports are roughly equivalent in terms of economic growth. Falling imports, though, implies economic pain in some other countries. Thus, all else being equal, it would be better if most of the improvement in the trade deficit came from rising exports rather than falling imports.

A big part of what made the Great Recession into a global downturn was an absolute collapse in global trade. This can clearly bee seen in the long-term graph of our imports and exports below (from http://www.calculatedriskblog.com/).

Falling imports and exports are clearly associated with recessions. In the Great Recession our imports collapsed faster than our exports, and so we had a very big improvement in the trade deficit. Thus this month's decline in both imports and exports is troubling and suggests that the financial turmoil in Europe is having an effect.



The trade deficit is almost a direct dollar for dollar reduction in GDP. Thus the growth in the trade deficit is a serious headwind for GDP growth. Fortunately, in the fourth quarter it looks like there is enough momentum from other sources so we will still have healthy growth for the quarter, but it looks like net exports are going to be a drag.

Trade Deficit More Worrisome Than Budget Deficit

The trade deficit is a far more serious economic problem, particularly in the short to medium term, than is the budget deficit. The trade deficit is directly responsible for the increase in the country's indebtedness to the rest of the world, not the budget deficit. That is not just a matter of opinion, it is an accounting identity.

Think about it this way: during WWII the Federal government ran budget deficits that were FAR larger as a percentage of GDP than we are running today, but we emerged from the war the biggest net creditor to the rest of the world that the world had ever seen up to that point. Then the Federal government owed a lot of money, but it owed it to U.S. citizens, not to foreign governments.

Slowly but surely, the trade deficit is bankrupting the country.

The biggest bilateral deficit once again was with China, by a large margin, but it fell to $26.9 billion from $28.1%. The big increase this month was with the European Union, where the deficit rose to $9.7 billion from the month from $8.0 billion. That was mostly due to a 6.9% decline in exports to Europe, and is a sign that the troubles there are having an impact on this side of the Atlantic.

Still Slipping in Oil

Our deficit with OPEC rose to $9.1 billion from $8.3 billion. That was mostly because the average price for imported oil was $102.50 in November, up from $98.84 in October, and way up from $76.81 a year ago. On a year-to-date basis, the price of imported oil has averaged $99.38, up from an average of $74.20 in the first eleven months of 2010.

The volume of imports also rose, averaging 8.874 million barrels a day, up from 8.490 million barrels in October, and from 8.596 million barrels a year ago. However, on a year-to-date basis we have shown some sings of weaning our self off our imported oil addiction, with an average of 9.118 million barrels, down from 9.262 million barrels a day averaged in the first eleven months of 2010.

For the month, the oil (and related products) deficit was $27.63 billion, representing 57.9% of the total trade deficit, and 43.7% of the goods deficit. That was up from $24.17 billion in October, or 55.8% of October's overall trade deficit. A year ago the oil deficit was $20.36 billion, or 52.4% of the total trade deficit.

Until we cure our imported oil addiction we are not going to solve out chronic trade deficit. We simply do not have the domestic reserves. We do, however, have ample domestic supplies of natural gas, which is currently in a glut, and hence very cheap. On an energy-equivalent basis it is now selling for $16.26 a barrel. If we could start to use natural gas as a transportation fuel, we could make a huge dent in our oil import bill.

The technology of using natural gas as a transportation fuel is well established. All that is missing is the political will to make it happen by solving the "chicken and egg" problem of nobody wanting to buy those cars since there is no place to refuel, and gas stations not wanting to invest in creating natural gas refueling stations since there are no cars using it on the road. A weaker dollar is needed to solve the non-oil part of the deficit.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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