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Trade Deficit Both Up and Down - Analyst Blog

The Trade Deficit fell in October to $43.47 billion from $44.17 billion, but the decline was only due to an upward revision to September from $43.11 billion. Thus, you could see it as a 1.6% decline, or a 0.8% increase depending if you use the current or original figures for September. It was better than the expected level of $44.0 billion. Factor in both the beat and the revisions and call it an in-line report.

On a year-over-year basis, the total trade deficit was up by 10.2% from $39.45 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 September, the goods deficit fell to $58.78 billion from $59.51 billion (revised up from $58.90 billion). Relative to a year ago, the goods deficit was up 12.0% from $52.50 billion. The Service surplus was down slightly from September to $15.32 billion from $15.34 billion (revised down from $15.79 billion). Relative to a year ago, it is up 18.9% from $12.89 billion.

Exploring Exports

Exports of goods fell by $1.49 billion, or 1.15%, for the month to $127.78 billion. Relative to a year ago, goods exports are up 13.52%. In other words, we are slightly the pace to meet President Obama's goal of doubling exports of goods over the next five years. On a year-to-date basis, goods exports are up 17.62%, above the pace needed to double over five years.

Service exports were up slightly for the month to $51.39 billion, from $51.35 billion, but September was revised up from $51.09 billion. They are up 9.46% year over year, which is well short of the pace needed to double over five years (just under 15%). Total exports fell 0.80% for the month to $179.17 billion and are up 12.33% year over year, below the pace needed to double over five years. On a year-to-date basis, total exports are up 15.52%, slightly above the doubling pace.

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 fell by 0.96%, but are up 11.90% year over year and by 14.45% on a year-to-date basis.

Inspecting Imports

Relative to a year ago, goods imports were up by $21.66 billion, or by 13.14%. At that pace, they are 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 $15.22 billion increase in goods exports. Service imports were up by $6 million on the month, or 0.02%.

In October, we bought from abroad $1.460 worth of goods for every dollar of goods we sold, the same as in September, and down from $1.46.5 a year ago. Including services, we imported $1.243, down from $1.245 in September, and down from $1.247 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 10.57% from the first ten months of 2010. The goods deficit is up 13.80%, offset by a 22.26% increase in the service surplus. Year to date, our deficit with the rest of the world is $465.22 billion, up from $420.73 billion in the first ten months of 2010.

Trade & Recession

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.

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 months decline in both imports and exports is troubling and suggests that the financial turmoil in Europe is having an effect.

Falling imports were just about the only thing keeping the economy on life support during those dark days. That, however, was just a transmission mechanism that spread the recession to the rest of the world. Thus, growing world trade is a good thing, but not if it comes at the expense of an ever rising U.S. trade deficit. In other words, all things else are not equal.

In the last two quarters, a reduction in the trade deficit added slightly to GDP growth. Absent the aid from trade growth would have been 1.51% in the third quarter, not 2.00%, and in the second quarter it would have been 1.06%, not 1.30%. A rise in the trade deficit was a drag in the first quarter, and without that drag growth would have been 0.74% instead of just 0.40%. However, any trade deficit at all is a subtraction from the overall level of GDP.

Trade Is the More Serious 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. While most of the foreign debt is in T-notes, try think of it as if we were selling off companies instead of T-notes. This month's trade deficit is the equivalent of the country selling off Colgate Palmolive ( CL ), while last month's deficit was the equivalent of selling off Nike ( NKE ).

How long would it take before every major company in the U.S. is in foreign hands if this keeps up? Put another way, the 2010 trade deficit totaled $497.82 billion, which is 64% what all the firms in the S&P 500 earned, worldwide, in 2010.

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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 Nasdaq, Inc.


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

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