April trade, one day late

Maybe my title should be "Boeing is back"

The surge in Arpil exports stemmed in part from a surge in Boeing’s monthly exports. But the increase in aircraft goes beyond just a monthly blip. By my calculations, US exports of civil aircraft, jet engines and aircraft parts are up 18.9% in the first four months of 2005 (y/y increase). This presumably reflects rising air travel and pent up demand for new aircraft. But last year’s fall in the euro/ dollar no doubt helped as well.

The April trade numbers were good across the board - despite the expected deterioration from the surprising fall in the March trade deficit.

Exports moved above $105 billion a month in monthy -- after seemingly being stuck around $100 billion for a longish time. Year over year, April exports were up 12.7% -- a nice recovery from the downtrend in February and March, when y/y growth dipped below 10%.

And the deceleration in non-oil import growth continued. Consider the trend in the year over year increase in monthly non-oil imports:

January: 17.1%

February: 15.4% March: 8.0% (Chinese new year)

April: 10.9% Setting March aside, monthly non-oil imports have been stuck at around $144 billion for several months now - a fact that has been obscured by higher oil imports.

(continues)

US exports to countries that export oil are booming: exports to OPEC are up over 50% and exports to resource-exporting South America are up 15%. No need for too much excitement though. US imports from OPEC are up by $9 billion ytd. Getting maybe $3.5 billion of that extra $9 billion oil bill back is nice, but the overall US deficit with oil exporting countries is still increasing. Conversely, US exports to the Pacific Rim are particularly anemic - up less than 3% y/y. Even fast growing China is not buying that much more from the US - exports are only up 7% y/y. US imports from China continue to grow rapidly - year to date, imports are up 28% y/y. But unlike last year, China does seem to be taking market share away from other Asians - US imports from Japan and the Asian NICs are also growing very, very slowly. Overall, though, China is big enough to push overall import growth from the Pacific Rim to 14% -- faster than the average increase in non-oil exports. And, as David Altig has noted, May Chinese data does not suggest any slowdown in Chinese export growth.

US exports to the EU have held up well in the face of Europe’s slowdown, at least to date - though it is fairly clear that the growth in US exports to Europe is slowing a bit. But US imports from Europe seem to be slowing even more. Exchange rates do matter. Take March and April combined (to control for Easter). US exports to the EU increased by 7.6%; US imports increased only 3.7% (in value terms). That is the kind of differential between export growth and import growth that is needed to seriously cut into the trade deficit.

My worry: the dollar has turned around and started to appreciate just as pretty clear evidence is starting to emerge that the (formerly) weak dollar (strong euro) was starting to have an impact. A weaker euro is good for Europe, but a stronger won’t help bring about the needed adjustment in the US. The lagged impact of the recent rise in the dollar won’t be felt for a while, but it is something worth watching.

The best case scenario for the 2005 trade deficit? Suppose non-oil imports stay around $144 billion a month - their current level. That would still generate y/y non-oil import growth in the 9% range - there was a big surge in imports during the course of 2004. Add in oil at $52 a barrel for the rest of the year and continued strong export growth - say 12%. The trade deficit would still widen to around $662 billion - and the current account deficit would be about $100 billion more, or roughly 6.3% of 2005 GDP.

That seems a bit too rosy in a world where the dollar is appreciating and European growth is slowing. Export growth of 11.5% and non-oil import growth of close to 13% -- the year to date numbers - would push the trade deficit up to $730 billion or so. If the world economy slows and the US economy doesn’t, y/y export growth might fall to 9% while y/y import growth ends up being around 12%. That would generate a trade deficit of around $745 billion and a current account deficit of around $845 billion (6.9% of US GDP). If Alan Greenspan is right about the current state of US economy, I certainly still expect a current account deficit in excess of $800 billion.