from Follow the Money

An early look at the 2006 current account deficit

April 13, 2006

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At the end of my post yesterday, I noted that the year over year growth rate in non-oil exports - 9.3% -- might be a bit misleading.   In 2006, the Chinese new year slowed US imports in February; in 2005, the impact came in March.   So the January + February comparison compares a strong month (January) and a weak month (February) against two strong months in 2005.   If March non-oil imports jump back to their January level, the year over year growth rate would be more like 11.8%.   That comparison makes more sense to me as well, since it picks up two strong and one weak month in both years.  


And to be honest, given how strong Chinese exports were in March, I wouldn't be surprised to see March non-oil imports top January non-oil imports. 

The current 11.7% growth in exports - a very strong growth rate, one that reflects a strong world economy that wants to buy a lot of Boeings - would imply exports would increase by a bit under $150b.

$70 a barrel oil for the rest of the year would - in my calculations - push the US oil import bill up by about $50b.

Combine 11.8% growth in non-oil exports and 11.1% growth in service exports (the 2005 y/y growth rate) and the US non-oil import bill would rise by around $200b.

Sum that up, and the trade balance would deteriorate by about $100 billion, to around $820 billion.   Supporting graphics have been outsourced to Menzie Chinn.

Add in a transfers deficit of $100b and a income deficit of $60b.  Remember, the US has to pay interest on its $800b in new debt from 2005, plus the interest bill on our existing debt should rise.

The resulting current account deficit: $980 billion.  Real close to $1 trillion.

If you prefer to reason from savings and investment rather than exports and imports, think no fall in investment as any fall in residential investment is offset by a rise in business investment and a further fall in national savings, both from a small rise in the fiscal deficit and a continued slump in household savings.  Broadly speaking, Americans will opt to save less rather than spend less on everything else as they spend more on oil and energy.

That projection is based on the continuation of current trends.   Simple extrapolation; no scare-mongering or doomsday forecasting.  Though I admit I had to play a bit with the non-oil import number to offset the impact of the Chinese New Year.

Personally, I suspect that both export and non-oil import growth will slow a bit as the year goes on, at least on a y/y basis.   Exports because of the lagged impact of dollar strength; imports because rising housing prices will provide less of a boost to consumption.    But if both fall, the overall impact on the deficit will be small - as the US will import and export less.

I don't quite see how anyone can predict that the current account deficit is about to peak based on current trends.    For one, the trade deficit looks set to continue to expand.  And even if the trade deficit stabilizes, interest on the US debt will start to push up the income deficit and the current account deficit.

What really scares me?  

The US may not have as a good a chance to export its way out of its deficit again. 

The fall in the dollar from 2002 through the end of 2004 is having the expected effect.    US export growth topped 10% in 2004, 2005 and 2006.   That is well above trend.   The post 1990 average is more like 6%.

Yet the combination of strong global growth and a weakening dollar didn't bring the overall deficit down.   That is because of the big gap between the US import base and the US export base, and because import growth has been every bit as strong as export growth.   

Without the impetus provided by US imports, US exports wouldn't be doing as well.   And strong import and export growth is not a formula for reducing the US trade deficit.

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