from Follow the Money

Better try to find some more dark matter (October trade data)

December 14, 2005

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It is pretty obvious that the US October trade deficit was quite large, even by recent American standards.   Taking into account expected valuation changes (US assets in Europe are currently on the books at 1.35 dollars/ euro, but that will change when the end 2005 data is released) as well as the size of the US current account deficit, I suspect the US net external debt will approach $4 trillion/ 30% of US GDP by the end of this year - a bit faster than Bank of America seems to expect.

Large deficits are to be expected if a country produces less (at least less refined petroleum), exports less (I would assume that grain exports through the Mississippi are a bit below average) an still consumes more.   

To me, the most interesting feature of the trade data is that non-petroleum imports are trending up once again.  Think $144 billion in January, only $144-145 billion in August, $148 billion in September and $152.6 billion in October.  Conversely, exports seem to have stalled, more or less, at around $106-$108 billion dollars.  At a minimum, the pace of export growth seems to be slowing.  This reverses the pattern of earlier this year, when monthly exports were heading up and monthly non-petroleum imports had stalled.  

What about non-petroleum energy imports?  They are not driving the trend either.    Netting out imports of refined product (imports of petrol and fuel oil are up by almost $3 billion since August), imports of crude and imports of both pipeline natural gas and LNG (up about $1.5 billion since August), US goods imports still increased from $115 billion in August to $119.1 billion in October.   

Call it the beginning of a trend.  Or a step adjustment.  But one way or another, the inventory correction that held down US imports for much of the first part of this year seems over.  If you look at the real import and real export data in the BEA's report, they too seem to suggest a reversal.  Real goods imports are rising again.  Real goods exports seem to have stalled.  (see p. 15 of the BEA release)

And I would not be surprised if the boost to US exports from a resurgent Boeing and the weak (end 2004) dollar is petering out.  Don't discount the civilian aircraft sector - combine planes, parts and engines, and exports of aircraft and components are up by $8 billion so far this year.  I am not sure a similar increase would be in the cards for next year even if the dollar has stayed at its end 2004 lows.

In the past, I have emphasized that US exports to Europe are growing faster than US exports to the Asia Pacific.  And if you compare US exports for the first ten months of this year v. US exports for the first ten months of last year, that is still quite true.  Exports to Europe have increased by 9% or so ($14.8 billion), exports to Asia are up only 5.4% ($9.3-$9.4 billion).    Yes, exports to China are growing fast - 19%, on a year over year basis.  But in dollar terms, exports to the euro zone are up by more ($7.8 billion) than exports to China ($5.2 billion).

But the times are a changing.  Judging from the monthly data (and it bounces around a lot), exports to Europe are slowing, while exports to Asia (and China in particular) are picking up.  October exports to the eurozone were only up by 1.6%, compared to 9.3% for Asia (and 33% for China).  That makes sense.  The dollar has strengthened against the euro, and a whole host of data confirms a pickup in Chinese import demand.   And rate of growth in China's exports to the US may be slowing just a bit.
We shouldn't get carried away though.  So far this year, the US has imported $200.6 billion from China, and exported $33.7 billion.  Relatively speaking, the US does better with OPEC, importing $103.1 billion and exporting $25.75 billion ...  but it all relative.  As Kash points out, the US runs a deficit with pretty much everyone.

But don't let alone say that China is just taking market share away from other Asian economies.  Yes, imports from the NICs are falling.  But the overall year-to-date import growth from Asia (12.6%) still exceeds the overall growth of the US economy, an the overall growth rate for non-oil imports (10.3% y/y).   Mexico's exports to the US, by contrast, are growing more slowly (8% y/y) than overall non-oil imports.  And that is happening even though Mexico has some oil to boost its overall export number up.  

The recent data put the US on track for an overall trade deficit of around $720 billion, and a current account deficit of $820 billion.   

Next year looks potentially ugly, at least numerically.   The US interest bill is set to rise, so keeping the current account constant likely requires a fall in the US trade deficit.  And barring a big fall in energy prices, it is hard to see the forces that will bring about that change.  Remember keeping the trade deficit  constant requires exports to grow substantially faster than imports.  Yet right now:

  1. Non-oil import growth looks to be picking up.   That may continue even if the economy slows somewhat as a result of the end of the inventory cycle that temporarily lowered the non-oil import growth rate.
  2. A stronger dollar is likely to slow export growth.
  3. A big fall in energy prices currently seems unlikely.
  4. If US imports from China only increase by 20% in 2006 (a significant slowdown) that alone would add $50 billion to US imports.  Even if US exports to China increase by $10 billion in 2006, the overall balance (barring offsetting changes elsewhere) would deteriorate by $40 billion ...
  5. I would expect the US deficit with Japan to increase as Toyota cuts into GM and Ford.  The recent strength of the dollar v. the yen won't help here.
  6. The interest on the $800 b plus of debt the US looks set to take on in 2005 will add roughly $40 billion to the current account deficit ....

The US current account deficit in the fourth quarter might top 7% of US GDP.  It is not hard to forecast a 2006 current account deficit above $900 billion.  A one trillion dollar deficit looks a bit much for 2006, but unless market demands for adjustment begin to emerge, the US is clearly heading there.  And potentially quite quickly.

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