On the surface, the February trade data doesn't seem to tell us much. The $58.4b February trade deficit is a tad smaller than the $58.9b January deficit, but the overall story is the same: the trade deficit seems to have stabilized at around $60b a month, $720b for the year. A $720b trade deficit still implies - if I am right about the income balance -- a $850b plus current account deficit.
Scratch the surface, though, and I think three stories emerge from the data:
1. US export growth looks to be slowing
2. The improvement on the import side from oil isn't going to last. Non-oil imports are still growing -- albeit a rather modest pace.
3. Europe is doing its part to support global rebalancing, Asia isn't.
Exports. On a y/y basis, exports were up 8.9% in February. But by recent standards that is a slow pace. February exports were actually $2.6b lower than in January. If March exports bounce back to their January level, the q/q growth in exports (annualized) would be around 4%. Nothing great. My biggest concern is that the export boom of 2004-06 is about to fizzle. Exports are now back at around 11% of GDP – about where they were in 2000.
Aircraft exports incidentally, are still up 20% ytd. Boeing’s order book is full, so export growth should remain positive. But Boeing literally cannot export any more planes until it brings new capacity to online. By my rough count, only 1 of the 17 777s Boeing has delivered this year went to a US airline, and only 17 of the 83 737 deliveries went to US customers (counting Boeing business jets as a US customer). Boeing only has delivered 3 767s and 3 747s this year -- its product line is basically 3s and 7s until the new generation 787 and modified 747-8 come on line. The Boeing delivery data is through March, so it doesn't match perfectly with the trade data.
Imports. Imports are up only 3% ytd (or 3.4% y/y for February). That is a very slow pace of import growth for the US. February imports were $3.3b lower than January imports.
Why? Easy. Petroleum imports fell by $3.7b in February. Prices fell from 52.23 per barrel to $50.71, but even more important, import volumes were quite low in February. Relative to February of last year, import volumes were down 12.4% (January was basically flat). The US is importing more hybrid cars, but I don’t think oil import volumes will consistently be as low as in February.
Ytd, petroleum imports are down 9% from last year. That isn’t going to last, unfortunately.
I also like to watch the non-oil (goods) import series. February non-oil imports were a bit higher than January non-oil imports. That is a bit of a surprise. The Chinese new year often throws off the data. But then again we know from the Chinese data that Chinese exports were quite strong in February. Y/y non-oil goods imports were up 7% in February. But that growth rate is distorted by the low number from last February. YTD, non-oil imports are up 4.7%.
All in all, I suspect the trade deficit is now on track to grow slightly in nominal terms – and stay roughly constant as a share of GDP. If non-oil import growth is around 5% for the year (and oil stays around $60), exports need to grow by around 7% to keep the overall trade balance roughly constant. That to me seems like a reasonable forecast, if the US avoids a recession. If export growth heads back up towards 10% and import growth stays at around 5%, the trade deficit would fall – but I would want to see stronger signs that the recent deceleration in export growth is over before making that prediction.
Europe v. Asia
On a bilateral basis, the US (goods) trade deficit with Europe, Canada and South America is now falling. The (goods) trade deficit with Mexico is flat. And the (goods) deficit with East Asia is rising. All the following numbers are year over year change in January-February exports and imports (i.e. the year to date, or ytd)
Exports to Canada are up 3.3%; imports from Canada are down 6.8%. Imports of lumber are down 34%; imports of shingles and wallboard are down 23%. Plus, Ontario is effectively part of an integrated North American auto industry clustered around Detroit that isn’t doing very well right now.
Exports to South America are up 20.6%; imports from South America are down 9%. Venezuela is spending a lot more and getting a lot less on its oil. The disparity between the export and import growth numbers here last – US export growth to South America is likely to slow over the course of the year.
Exports to the EU are up 23.7%; imports are only up 4.1%. Exports to the Eurozone are up 23.7% as well, imports from the eurozone are up 7.5%. US demand hasn’t been driving the German export machine. The US bilateral trade deficit with EU was about $19b at this point last year, it is only $13b this year.
It is time to stop talking about how Europe needs to contribute more to “rebalancing” and start giving Europe credit for doing its part. European growth is up. The Euro is strong. The eurozone’s current account balance is actually improving. But it is improving on the back of a lower oil import bill and very strong exports to Eastern Europe and the oil exporting economies – not on the back of strong exports to the US.
Exports to Asia (the Pacific Rim) are up 12.2%. Imports are up 11.5%. But the US only exports about 40% as much as imports from the Pacific Rim so the overall deficit is still rising. At this point last year, the US deficit with Asia was $52-53b. It is $59-60b so far this year.
Exports to China are up 18.7%. Imports from China are up 23.8%. US exports to China are only about 1/5 the size of US imports, so the bilateral trade deficit with China is still heading up. Perhaps most importantly the pace of US import growth from China has picked up – it was in the high teens (on a y/y basis) most of last year.
Exports to the rest of the Pacific Rim are up 10.6% and imports are up 4.3%. Given the gap between US exports and US imports, that is enough to keep the US balance with the rest of Asia roughly constant.
My take on all of this is pretty well known. Exchange rates matter. They aren’t the only thing that matters of course. The slowdown in the US has slowed US import growth – and notably slowed US demand for construction materials. But it is hard to explain the growing US deficit with Asia and the shrinking US deficit with Europe solely on the basis of growth differentials. Both Europe and China are growing rather nicely right now. The US deficit with Europe is falling fast, The US deficit with Asia generally – and China specifically – is rising just as fast.