from Follow the Money

Has the US trade deficit peaked?

July 13, 2005

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A $55.35 billion monthly deficit is smaller than a $60 billion deficit (February),or even a $59 billion deficit (November). The three monthly rolling average of the monthly trade deficit peaked in February at $57.6 billion and is now -- gasp -- heading down. It was $55.3 billion in May.

So has the deficit peaked?

Not so fast.

The slight fall in the May deficit (relative to April) is explained, at least in part, by a slight dip in oil prices. WTI was a bit under $50 a barrel in May, v. $53 a barrel in April, and the average price of imported crude was $1.70 a barrel lower in May than in April. So monthly US oil imports fell by about $1.3 billion -- about what Calculated Risk predicted.

That is not the entire story though.

US non-oil goods imports have been stuck at $117 billion a month all year. Service imports are also flat at around $27 billion a month.

On a year over year basis, that still works out to be a substantial increase, 12-13% or so (though the May 05 over May 04 y/y increase is smaller, more like 9%). But the absence of stronger growth in non-oil imports is clearly helping to keep the overall deficit. Leaving the small downtick in May aside, the US oil import bill is growing. But at least in the first two months of the second quarter, the increase in the US monthly oil import bill has been offset by higher exports.

Looking ahead, the pace of US export growth looks likely to moderate. A slowing world economy; a strong (er) dollar. The US oil import bill looks likely to continue to increase, at least if oil stays relatively high. The big question is what happens to non-oil imports.

My best guess is that non-oil imports will start to grow on a month to month basis once again, generating y/y growth in the 10-11% range. Combine that will decent (9-10% or so) export growth and oil at $60 a barrel for the rest of the year, and I get a 2005 US trade deficit of around $750 billion. Even if monthly imports of goods and services stay constant at their current level (around $144 billion a month), strong import growth during the course of 2004, rising imports of oil and higher oil prices would still combine to push the trade deficit up substantially, to around $710 billion.

The current account deficit should be about $100 billion larger than the trade deficit, or somewhere between $810 and $850 billion. That is far bigger than the $670 billion 2005 current account deficit.

My bottom line: neither the monthly deficit nor the annual deficit has peaked yet.

A few observations on the bilateral data:

1. US exports to Asia remain flat. $88.45 billion so far this year v. $ 86.64 billion last year. And don’t let anyone talk of China’s growing importance as a market for US goods. Exports to China are only up by $1.1 billion so far this year (8%). Put differently, Chinese imports from the US are falling as a share of Chinese GDP.

2. US exports to Europe are up by far more than US exports to China ($8b v. around $1b), as are US exports to the "eurozone" (up almost $5 b ytd). Percentage wise, US exports to Europe are growing faster than US exports to China, even though Europe is growing far more slowly than China. Exchange rates matter.

3. US exports to Latin America and the OPEC countries -- areas where US goods often compete with goods from Europe and Japan -- are exploding. US exports to South America are up 16% y/y; US exports to OPEC are up 52% (off a low base). Sorry to be a broken record, but do compare those growth rates with the growth rate in US exports to China (8% y/y). Year to date, 2005 US exports to OPEC and Latin America are about $8 billion higher than in 2004.

4. US imports from China continue to rise rapidly -- they are up 28% y/y. 28% growth in imports and 8% growth in exports, works out to an estimated US bilateral deficit with China of $215 billion or so.

5. US imports and US exports from other Asian countries are more or less flat. Imports are up only 6% y/y. But exports are only up by 1%. That means the overall deficit with Asia-China is still growing, just not as fast as the deficit with China.

My conclusions?

The (formerly) weak dollar is starting to have an impact on the trade balance. It is helping keep US exports to Europe up. And it is helping the US compete with European and Japanese goods in third party markets. If a better-than-expected trade number leads to a rally in the dollar, better-than-expected trade numbers won’t last for long.

Commodity exporting countries in South America and oil exporting countries are starting to spend their higher export earnings, not just to save them.

And, as Jonathan Anderson

has noted, rapid growth in China is not translating into rapid growth in Chinese demand for US goods. China -- and Asia writ large -- continues to rely on external demand to support its growth. And outside of China, Asia is clearly slowing -- pinched by Chinese competition in the US market and rising oil prices. One caveat: my calculations were all done a bit quickly -- I think they are right, but no guarantees.

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