from Follow the Money

Big, and getting bigger. The 2005 trade and current account deficit

February 10, 2006

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$65.7b in December

$198.2 b for the fourth quarter

$725.8 b for the year.

Big numbers, all.

The roughly $200b fourth quarter trade deficit was about as big as the $200 b quarterly current account deficit in each of the first three quarters.    The fourth quarter's current account deficit obviously will be a bit bigger.   I expect a q4 current account deficit of between $223b and $228b (I think transfers and income payments will add at least $25 b to the total) - or a q4 current account deficit of above 7% of US GDP.

For 2005, the current account deficit should come in between $815b and $820b (6.5-6.6% of GDP).  A $225 billion quarterly current account deficit - sustained over an entire year - works out to $900b.   What's more, the US is entering into 2006 with a bit of momentum.  Of the bad kind.

The average price per barrel price of US crude oil imports was $46.8 a barrel in 2005.  It will be a bit higher in 2006.

And non-oil import growth (goods only) surged to 11% (y/y) in December. For most of 2005, non-oil goods imports were stalled at around $117b a month.  They hit $125.7b in December.   Q4 2005/ Q4 2004 non-oil goods imports are up, by my calculations, 8.8%.  That's faster than nominal GDP.  

The resumption in rapid growth of non-oil imports in the fourth quarter is, to my mind, the real story here.

A few thoughts on 06 and 07, and a bunch of tidbits follow.  The tidbits first:

  • Oil import volumes only grew 1.7% in 2005.  Higher price did have an impact of US behavior.  Alas, higher prices had an even bigger impact on the United States oil import bill, which increased 39.4%, to 243.2 billion.
  • The US spent almost exactly as much on imports from China - 243.46b - as on imports of petroleum -- $243.18b (using the raw data).  But oil imports did grow just a bit faster than imports from China.  US imports from China increased by 23.8% in 2005. 
  • Bilateral trade deficits are not that important, but the US bilateral trade deficit with China is symbolic of China's overall surplus (despite its oil import bill), and the United States overall deficit.  It topped $200b in 2005.
  • David Barboza of the New York Times might want to note that overall US imports from the Asia Pacific grew by 12% in 2005 - faster than US nominal GDP.   Yes, production is shifting within Asia.   But overall goods imports from Asia are now 4.4% of US GDP.  That's up substantially from 2001-03, when imports from Asia averaged about 3.75% of US GDP.   And even above the 2000 peak - when the combination of the legacy of the Asian crisis and the tech boom pulled US imports from Asia way, way up - to 4.25% of US GDP.  
  • Imports from Asia may be not be rising as a share of total US imports, but it overall imports are rising relative to GDP, imports from Asia are rising relative to US GDP as well.  Barboza's story left out the critical scale variable -- imports v. GDP.   There are two stories here - a shift within Asia, and an overall rise in US imports from Asia.   Barboza might also have usefully noted that Asia accounts for a smaller share of US goods exports (25%) than goods imports (33%).  Asia as a whole - and China in particular - does have a role to play in the broad global adjustment.  But make no mistake the needed adjustment is global. 
  • US exports to the eurozone, in dollar terms, not in percentage terms, increased by more than US exports to China.   Exports to euroland were up $10.2 billion, exports to China increased by $7.1 billion.  Sclerotic Europe as a whole imported $13.7b more from the US in 2005 than in 2004, the dynamic Asian Pacific region imported $13.2 b more. 
  • November-December US exports to the eurozone were up 10.9% y/y.  Not bad.  That's faster than the full year 05/ full year 04 growth rate -- a good sign.  I suspect that this growth will slow though.   The euro/ dollar.   But maybe US exports of engines and components to Airbus will help keep US export growth up in 2006.

Project out current oil prices and 10% non-oil import growth for 2006, and the US trade deficit gets a lot bigger (I'll provide some numbers later).   Add in rising (net) interest payments, and the US current account deficit gets a lot bigger.    Unless something changes, I don't think a current account deficit of 7.3-7.5% of GDP is out of the question.

Non-oil import growth is currently accelerating.  That may be a temporary thing.  But unless it changes, the US is headed for bigger deficits.

That's why I was a bit surprised that PIMCO thinks a double digit US current account deficit is an extreme - fat tail - outcome. 

"What I would like to ponder in this Investment Outlook are not necessarily the merits of either side of that argument but the shape of the future yield curve if current globalization/monetary recycling trends continue. One of Mohamed's last admonitions to us came last week in an Investment Committee meeting where he suggested we view the world without the economic/financial fat tails represented by a U.S. trade deficit imploding to 2% or 3% GDP or exploding to new peaks approaching double digits."

OK, Mohamed El-Erian is no longer at PIMCO, and he framed the issue as a double-digit trade deficit, not a double-digit current account deficit.    They are a bit different.

But I suspect that the US is a lot closer to current account deficit that approaches double digits than many realize.  Imports are now 16% of US GDP, and exports are 10.2% of US GDP.   Imports are heading up relative to GDP.    The current value of the dollar may not be consistent with a sharp rise in exports relative to GDP.   I don't think a trade deficit of 7% of GDP - again, barring some significant shifts - is unlikely in a couple of years, or even sooner.  It just represents the continuation of current trends.

Transfers will continue to add 0.7 to 0.8% of US GDP to the US current account deficit.

And the income balance is poised to shift into a significant deficit over the next few years.  By 2007, I don't think an income deficit of 1.2-1.3% of GDP is out of the question.    Add that all up,  and the US current account deficit could be approaching 9% of US GDP, just based on the continuation of current trends and the shift in the income balance.   That shift has already been programmed in - the US took out lots of cheap external debt from 2002-2004 that is in the process of being repriced, and we are continuing to add to our debt stock.

Obviously, the savings and investment balance has to shift a bit to be consistent with that kind of overall deficit ...  the US has to save less, or invest more.    But is not entirely implausible if the US doesn't cut back on its consumption even as a rising share of its income has to be devoted to external debt service.

Right now,  I just don't see the forces that will keep the US from heading toward a double digit current account deficit.  Avoiding that "Fat-tail" outcome requires change, not more of the same.

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