from Follow the Money

How long can non-oil imports remain flat if the US economy continues to grow? (The May trade data)

July 12, 2006

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The basic story in the May data is that nothing much has changed, other than the oil price.

And that in some sense is good news. 

Export growth continues at a quite nice clip.  Thank you Boeing.   Aircraft exports in May were $0.7b more than in April (updated, initially I said 0.5b -- bad rounding).  And for the year, exports are up $5b – or about $1 b a month on average.   

The oil import bill continues to rise.  Almost all because of higher prices.  The average cost of imported crude was $61.75 in May.    Oil import volume in May were a bit higher than in May last year, but in the broader sense of things, volume growth remains subdued.  For the first five months of 06, overall “energy related petroleum products” import volumes are down 2% (Exhibit 17).

And non-oil imports have basically been flat all year.  May was no exception.  Indeed, non-oil imports in May look to be down every so slightly from earlier in the year.  Non-oil goods and services imports have been around $155b all year.   Non-oil goods imports have been around $127b.   January was higher.  February was lower (Chinese new year).   And May was a bit lower.  I was going to try to add in a graph, but Calculated Risk beat me to it.

On the import side, the US economy has already slowed.   Though that may be, in part, a reaction to the very fast increase in imports in q4.   

Looking ahead, I expect some slowdown in export growth.   The first five months have been very, very strong.  Take whatever measure you like of exports (y/y increase in three month moving average, increase in first five months of this year over last year, May 06 over May 05).  It shows something like 12% y/y igrowth.  For that to continue, exports would need to average $123.2b in the fourth quarter – up from 118.7b in May and $116b in April and March.    That is possible, but there are some risks that export growth may slow down a bit later in the year. 

And I wouldn’t expect non-oil imports to remain totally flat if the US economy continues to grow.   Some pick up – say to $160b a month by the fourth quarter – is to be expected even if the economy does slow.

In sum, I would not bank on the second half of the year being as good as the first half once you take oil out of the picture. 

I also don’t want to deny the recent improvement in the non-oil trade balance     It certainly has improved.  Look at Exhibit 9.  May 2006 was better than September 2005-January 2006.      And even a bit better than May 2005.     It now looks like the non-oil deficit blipped up (or down) in the fourth quarter, and then started to come down.   

But I also don’t want to exaggerate the improvement.  The non-oil deficit is still substantial – around $45b a month.   And I am not sure how much longer non-oil imports can remain flat. 

Another way of making this point.   So far this year, US exports (goods and services) have averaged $116b a month, and there looks to be a slight upward trend.    US imports (goods and services, including oil) have averaged about $180b a month in the first five months of 2006.    At this point last year, average monthly exports were around $103.5b, and imports were around $160b.    That is another way of saying the overall balance got worse.   

Now net out oil.  Average monthly imports were around $141.6b in first five months of 2005.  And $154.7b in the first five months of 06.     In percentage terms, exports grew faster than non-oil imports on a y/y basis.   But in dollar terms, both exports and non-oil imports are running about  $13b a month higher.     

But all the growth in non-oil imports came in the tail half of 2005 – not in 2006.  So right now, the monthly trend suggests further improvements in the non-oil balance (and probably a bit more bad news on the oil front).   Forecasts for the year depend on whether that trend can be sustained.  My bet is still no.  But if there isn’t something of a rebound in monthly non-oil imports soon, I’ll have to start changing my mind.

A final set of points – US goods exports to the Pacific rim are growing faster (14% y/y) than US goods imports (11.5%).   And US goods exports to China are growing faster (up 36% y/y) than US goods imports (up 17%).     

But note three things:

  • One, US exports need to grow more than twice as fast as US imports to keep the overall deficit with the Pacific Rim from deteriorating.  And with China, exports need to grow five times as fast.   Neither is happening.   The base is bad. 
  • Two, US imports from the Pacific Rim are growing faster than nominal US GDP.  China is not just taking market share from elsewhere in Asia.  Overall imports from Asia are rising faster than US GDP.
  • Three, I suspect a lot of the downside risk to US export growth comes from the possibility that the current surge in US exports to China won’t be sustained – at least not at its current pace – for the entire year.   China bought a ton of Boeings in the first part of 2006.   Hu was visiting the US and stopped by Seattle for a reason.   I suspect Boeing will ship a lot of Boeings in the second half as well.  But keeping up the current pace of growth requires shipping more Boeings in the second half of the year than in the first half.   I don’t know Boeing’s production schedule, but my guess is that may be hard. 

Another thing to watch – some of the growth in US exports to China has come because electronic goods that formerly were assembled in Taiwan are now assembled in China.  So some chips that used to be exports to Taiwan are now exported to China.  US exports to Taiwan are down y/y.  The overall effect of this is small (exports to Taiwan in the first five months fell by about $0.9b, exports to China rose by $5.7b), but it is important to remember that changes in the location of final production don’t just change more than just the final location of US imports.  They also change the direction of some US exports.

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