from Follow the Money

The 2006 trade data

February 13, 2007

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It seems to me that there are at least three big stories in the US trade data, maybe four or five ...

The first is that US exports grew quite strongly in 2006.  And goods exports outperformed services (and Boeing outperformed everyone).  Total exports were up 12.75%, goods exports were up 14.4% and Boeing (civil aviation) exports were up 38.8%.  On y/y basis, q4 exports were right in line with those trends.

The second is that the pace of non-oil import growth slowed.  Non-oil goods import growth (y/y) was around 9%, but the pace of growth slowed to around 7% in the fourth quarter.   The slowdown was apparent in the y/y data on US import growth from pretty much every source of goods imports other than China.  US imports from China are still growing 18%, but imports from both the rest of Asia (the rest of the Pacific Rim in the trade data) and Europe were up a bit over 7%.  The stunner -- at least for me -- was that total US goods imports from Canada were up only 4.5% y/y, and that total includes a lot of energy (Rachel Ziemba of RGE has more; Canadian exports to the US have been very weak recently).    

The third is that higher oil prices do lead even the US to cut back on its use of oil.  Petroleum import volumes fell 2.3% in 2006.

The fourth big story -- one that is somewhat controversial for reasons that elude me -- is that exchange rate adjustment works.    US exports to China were up by about $13.3b (32% -- though the december increase was 21-22%, suggesting a slowdown in the pace of growth), but US imports from China were up by $44.3b.   The bilateral deficit with China continued to grow.   That is true of the Asian Pacific region writ large as well -- US exports to the rest of the Pacific Rim increased by $20.5b, but imports were up by $22.8b.   The overall goods balance with the Pacific Rim deteriorated by about $33.3b.  

Both the yuan and the yen are fairly weak -- and certainly haven't  moved as much against the dollar as the euro and the pound over the past few years.   So it is worth comparing the evolution of the US trade balance with the Pacific Rim to the evolution of the US trade balance with Europe.    US exports to the EU increased by $27.5b in 2006 (14.8%), while US imports only increased by $21.8b (7.05%), so the US trade deficit with Europe actually fell.  

The fact that the US deficit with Europe has turned a corner while the US deficit with China and Asia writ large hasn't is something that I thought Peter Goodman and Nell Henderson's story on the recent surge in US exports missed.   The y/y growth rates in US exports to China are impressive, but aren't coming anywhere close to offsetting the increase in US imports from China.   With Europe, by contrast, the deficit is heading down (and Europe, by the way did well in 2006 -- adjustment need not be painful ...)

The relatively slow growth in US imports from Canada is another example where the exchange rate may be having an impact, though the troubles of the US auto sector (with lots of plants in Canada) and the US housing sector (which uses some Canadian timber) may have also played a role.

The fifth big story is that the US trade deficit arguably has turned the corner.  The overall goods and services trade deficit widened by about $46.9b in 2006, to $763.6b.  But $41.7b of that deterioration came from the deterioration in the net oil balance.  As Menzie Chinn has long pointed out, the non-oil balance has been stable in nominal terms and falling in real terms.

And if you project out stable oil prices (the average q4 price for imported oil was $53.8 a barrel -- a level well below the $58 a barrel average for the year), 7% growth in non-oil goods imports and 14% growth in goods exports and current trends in service exports (8-9% growth) and imports (8-9% growth), the trade balance should fall in 2007.  Both Bloomberg and the New York Times quote Nigel Gault on this.

``In the long run, I expect the deficit to gradually shrink,'' said Nigel Gault, director of U.S. research at Global Insight Inc. in Lexington, Massachusetts. ``We expect growth in exports combined with slower import growth. The 2007 annual deficit should be substantially below the 2006 figure.''

I suspect Gault embodies the current conventional wisdom on the street.  Stephen Jen has also called a turn, in both the current account and trade deficit. 

Here though I am a bit of a holdout. I am not convinced that it makes sense to project out current trends -- at least not the current y/y growth rates.  

The monthly trends seem to me to suggest a slowdown in the pace of export growth (look at the first graph in the BEA data release).  Conversely, there are some tenative signs that non-oil import growth is picking up a bit (December imports were $134b, up from $131-132b in October/ November).    My personal view is that the trade deficit is more likely to stabilize at roughly its current level than to shrink.

The story here is simple.  Current strong US export growth reflects the lagged impact of dollar weakness in 2003 and 2004 and early 2005.   But compared to say 2004, the dollar hasn't weakened much.  Not v. the euro.  It has actually strengthened v. the yen.  And while the RMB has appreciated in nominal terms, it hasn't appreciated by enough to offset inflation differentials and higher Chinese productivity growth.   The global economy should remain strong, but probably not quite as strong as it has been ... as the lagged impact of the dollar's past fall wears off, export growth will slow a bit.

Conversely, if the US economy avoids a housing-induced slowdown, as most now think, well, non-oil imports are likely to grow in line with nominal GDP, and perhaps a bit faster.  China will continue to make market share from both US producers and others selling to the US market.

Plus, as I like to point out, Boeing simply cannot export many more planes until it steps up production (likely in 2008, when the 787 line opens).  Pretty much every 777 Boeing now makes is being exported.    Boeing's exports won't grow by another 40% ($10b) in 2007.   So one source of export growth will go away, temporarily.  

And on the import side, well, the US looks set to import a lot more cars from Japan and elsewhere as GM and Ford cut back.  Toyota doesn't have the capacity to supply the US market from its US plants alone -- the ratio between Toyota's US sales and its US production is slipping.   I know Toyota plans to scale up its US production, but I would bet it would scale up its production by more and faster if the yen were a bit stronger ...

Finally, a $764b goods and services traded deficit, a $84b transfers deficit and a $13b income deficit (personally, I suspect it will be higher, but I was conservative here) adds up to a $861b current account deficit.    And even if the trade deficit stabilizes, I expect that to rise substantially in 2007.  Watch the income line.  More later. 

More on:

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