from Follow the Money

The June trade data. Changes in relative prices do matter

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The June trade deficit -- $58.8 billion -- was a bit bigger than the market expected, and quite a bit bigger than the May deficit ($55.4 b).   Annualized, it works out to a $706 billion trade deficit. 

The US -- obviously - is spending a lot more to import oil. The US oil import bill in the first half of 2005 was about $29 billion more than the US oil import bill in the first half of 2004.   All told, I expect the US to spend about $57 b more on imported oil in 2005 than in 2004.

The story is a bit different if you look at the amount of oil the US imports, not how much the US pays for it.  Oil import volumes grew by 7.3% in 2003, and 5.7% in 2004.  The pace of increase so far this year.  Only 2.3%.   Higher prices are having an impact.

Since the US trade deficit continues to rise - I am looking for a 2005 trade deficit of between $720-730 billion (v. $617.6 b in 2004) there is a tendency to think that US exports have not been doing well.

Not true. 

US exports have been doing just fine.  They grew by 12.3% in 2004, and are up 11.7% in the first half of 2005 (All data comes from the BEA June trade release).   In recent months, the y/y increase has ranged between 13% (June -- but that reflects low exports in June 2004, not any increase in June 2005 v. May 2005) and 9% (May).  Not bad at all.  

The lagged impact of the dollar's fall in 2003 and 2004 is having the effect one would expect.   This is slightly off topic, but I wonder if the post 2001 down turn in world travel does not help to explain the limited impact of dollar depreciation on US exports in 2003.  You cannot sell what you don't produce and right now, the US produces a lot of aircraft and aircraft engines. With a weak dollar, the US was well positioned to sell more aircraft, but it had to wait until global demand for aircraft rebounded.  It would be in an even better place if Boeing had a slightly broader range of new models to sell.

As Menzie Chen notes, dollar depreciation generally reduces the trade deficit by increasing the dollar value of US exports, not by reducing the dollar value of US imports.  We got the surge in US exports.   But the surge in US exports has not led to a fall in the trade deficit because strong US demand growth has kept US import growth rates high. 

With a huge gap between what the US imports and what the US exports, US export have to grow by about 50% more than US imports just to keep the trade deficit constant.  That has not happened.

And it is not just oil.  Oil imports (in dollar terms) increased by 35% in 2004, and are up by about 33% so far in 2005.   You might expect that the US consumer would respond to higher oil prices by cutting back on their consumption of other goods, including imported goods.  But you would be wrong.  Non-oil imports grew by 14.6% in 2004, and are up 11.8% so far in 2005.    That pace of growth moderated a bit in recent months - the y/y increase in non-oil imports has been around 9% in the second quarter.

That largely was because non-oil imports stalled out.  They were stuck at around $144 billion a month between January and May.   It now seems likely that this slowdown reflected an inventory correction.  The y/y increase in non-oil imports in January 2005 was absolutely insane, so some slowdown was expected.  Since that correction now seems behind us, the monthly non-oil US import bill looks set to rise throughout the remainder of the year.  In June, non-oil imports ticked up by $1.65 billion or so, to around $146 billion.   Watch that number for the rest of the year - I expect it will keep climbing.   A record monthly oil import bill in June (seasonally adjusted) did not keep the US non-oil imports from rising.

For the year, I expect strong US export growth - driven by strong growth in US exports to OPEC, Latin America, Canada and yes, Europe - to continue.  10-11% y/y growth now seems possible.    But I expect non-oil import growth to be similar.   10% growth in exports and 10% growth in non-oil imports, plus oil at around $60 a barrel for the rest of the year, produces a $720 b trade deficit.11% growth in exports and imports produces a deficit that is only a bit above $720 billion.  I would not be surprised if non-oil imports end up increasing a tad faster than exports - pushing the trade (goods and services) deficit toward $730 billion.

That implies monthly trade deficits of around $63 billion (on average) in the second half of the year.  Sounds high, but oil is kind of high.  And Calculated Risk is reporting that the West Coast ports are putting on an extra shift to handle all the goods the US is importing from East Asia.

That works out to a current account deficit of $820-830 billion this year - or around 6.7% of US GDP.  A 7% plus current account deficit for 2006 seems likely, unless the US consumer finally gives out (and the US economy slows).

Expect to hear plenty of talk about booming US exports to China over the coming months as the US trade policy debate heats up.

And US exports to China are growing faster (up 10% in the first half of 2005) than US exports to the rest of the Pacific Rim (up only 2%).  

But don't believe the hype.  The real story is that China's explosive growth has not translated into a surge in Chinese demand for US goods. 

US exports to China in the first half of 2005 are $1.7 billion higher than in the first half of 2004.    US exports of debt to China are growing far faster.  The $1.7 b increase in US exports to China should be compared with the $10.7 b increase in US exports to Canada, the $10.4 b increase in US exports to Europe (including a $5.8 b increase in US exports to the moribund eurozone), the $5.1 b increase in US exports to South and Central America or $4.7 billion increase in US exports to OPEC.   OPEC!

US exports to OPEC are increasing at a 47% annual clip - even faster than US imports (growing at a 32% clip).    But percentage changes can deceive - the $4.7 billion increase in US exports in the first half of 2005 (v. the first half of 04) should be compared to the $14.1 billion increase in US imports from OPEC.    

The US bilateral trade deficit with OPEC countries is rising fast - it could well reach $90 billion this year.

But if current import and export growth rates with China continue, the US bilateral deficit with China will top $210 billion.   Economically, what matters is China's overall trade surplus, not its bilateral trade surplus with the US.  But that too is growing rapidly.  US goods imports from China are growing faster (27%) than overall US imports (13/8%), or US goods imports from the rest of the Pacific Rim (5%).   China is growing at least two times as fast as the US, but US imports from China are growing almost three times as fast as US exports to China.

Put differently, US imports from China are growing almost as fast as the US oil import bill. Don't expect US-Chinese trade friction to go away anytime soon. 

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