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Imports surge, GDP and exports don’t …

January 27, 2006

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United States

Budget, Debt, and Deficits


The market thinks that the (bad) q4 GDP number is old news; the economy is looking far better in q1.   The market is also banking on stronger export growth to help support US growth in 2006.  See Justin Lahart.   I hope they are not banking on a mirage.

There isn't much in the q4 data that supports the argument that US export growth is accelerating.   The quarterly data is actually more consistent with a pick up in US imports, and a slowdown in US exports.

Exports were up 7.5% in q1, 10.7% in q2, 2.5% in q3 and 2.4% in q4.   Imports were up 7.4% in q1, fell 0.3% in q2, rose 2.4% in q3 and rose another 9.1% in q4.

Neither the fall in import growth in q2 nor the rise in q4 matches up with consumption growth - personal consumption grew by 3.5% in q1, 3.4% in q2, 4.1% in q3 and 1.1% in q4.  All numbers are q/q.   And they all can be visualized more easily if you take a look at the decomposition of GDP growth that Dr. Hamilton of Econbrowser has put together.

What happened - well, there was an electronics inventory correction earlier in the year, which seems to be over.  Note that sales of computers added 0.3% to q4 GDP, twice as much as in q3.  And in q3, there was a surge in auto sales as US producers cleared inventory.   Auto production added 0.55% to US GDP in q3, and subtracted 0.6% in q4.  Is what's good for GM is still good for America?   

The US economy is still not quite driven exclusively by New York banks serving as prime brokers for hedge funds and California and Nevada real estate ...

Electronics and autos probably explain why slower demand growth in q4 coincided with a pick up in imports.  More electronics sales meant more imports; Detroit's woes will likely translate into more imports of autos and auto parts.

The increase in the q4 trade deficit was not all the product of oil - the constant dollar trade deficit rose to $650 billion in q4.    Net exports subtracted about 1.2% from GDP in q4.

And if imports continue to rise even as overall demand growth slows - for reasons that Barry Ritholz, Calculated Risk and others have laid out well, net exports will continue to be a big drag on US growth.

With oil at $65 plus and interest payments on US external debt rising, I just don't see how the folks in Morgan Stanley's currency team are forecasting the US current account deficit will fall back to 6.5% at the end of 2006 (v roughly 7% in q4).   Not unless they are forecasting a big US slump.  Rising debt and rising short-term rates will easily add $50b to the United States' 2006 interest bill.  $65 oil rather than $55 oil implies a rise of $50 billion or so in the US oil import bill.  Yes, the US should be able to export more to the oil states, but everyone else will be paying more for their oil too, and thus have less to spend on US goods ...

I suspect that the market is overestimating the impact of a 1% or so growth pick up in Europe on US trade.  Sure, it helps.   But maybe not as much as a $/euro at 1.35.     I also doubt that a surge in US exports to Europe - or a shift in Europe's aggregate current account from rough balance to a small deficit -- will drive a big fall in the US trade deficit.   My long-standing thesis is that the counterpart to the US deficit is not found in Europe, but in the emerging world.  And policy shifts in the emerging world - not a cyclical pick up in Europe - will drive the global adjustment process. 

That is why I have trouble taking the recent Rogers/ Engel study on the US current account deficit seriously (hat tip, Calculated Risk).   Their model leaves out the emerging world.   That means it leaves out by far the biggest source of financing for the US.  And do they really think that the US share of world GDP will grow relative to the emerging world's share of world GDP over the next twenty years?  Their paper seems built on a model that has little relationship with current reality ...