from Follow the Money

Oil helps the September trade balance, but how long will the improvement last?

November 9, 2006

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A $3 billlion fall in the United States (seasonally adjusted) oil import bill brought the September trade deficit down, as expected.   Oil import prices fell from $66.1 a barrel to $62.5 -- and volumes also look to be a bit lower than August.

Exports also inched up.

But to me what really counts if the non-oil goods import  -- it was $132.14b, a bit lower than$133.12b recorded in August, but also well above the $128-129b range of earlier in the year.   For the quarter, monthly non-oil goods imports averaged $131.7b, v. a $128.6b or so monthly average in q2 -- that is a 3.1% q/q increase, or 13.2% annualized (in nominal terms).   Q3 2006 non-oil goods imports are also up around 11% relative to q3 2005 .    US exports are not growing fast enough to offset that kind of growth in non-oil goods imports on a sustained basis. 

Of course, we don't know if the trend that matters is the stability/ slight fall in non-oil goods imports between August and September or the increase in q3 relative to q2.   Monthly data bounces around.  

China's October export data hardly suggest much of a slowdown in US imports. On the other hand, most analysts on the street seem to believe that the surge in imports in q3 led to a buildup of inventories, and expect that September data augers a period of relatively weak non-oil import growth as inventories are drawn down.

Speaking of China, US imports from China were up by almost 19% (18.8%) if you compare August and September of 2006 to the same months of 2005.   That is a bit higher than the 17.2% if you compare the first three quarters of 2006 to the first three quarters of 2005.    

The pace at which US imports from China are growing did pick up slightly in the third quarter.   But it is also pretty clear that growing US imports from China haven't been the sole force driving the recent acceleration in Chinese export growth -- US imports from China are up say 19% y/y in recent months; overall Chinese exports are up 30%.   The US share of Chinese exports is shrinking.

Finally, for the third quarter, the deficit in goods and services trade looks to be around $201b.  Add in a transferes deficit of $20-25b (my estimate) and an income deficit of $5-10b (my estimate) and the q3 current account deficit should be somewhere between $225b and $235b.   Annualized, that works out to around $900b.  And even with lower oil prices, I currently expect a similar deficit in q4.   

The price of imported oil should fall from its $64.5 dollar a barrel average in q3.   But the average price of actual imports never rose to $80 -- so the fall in actual import prices won't be quite as dramatic as the move in the spot market.   And while the US oil import bill should shrink, the US external interest bill will rise.   I don't think the average interest rate on US external debt will be the 4% it was in the first half of the year. 

Consequently, higher interest payments on US external debt will, in my view, more than offset any improvement in the trade balance from lower oil prices. And if non-oil imports continue to rise in the fourth quarter, well, the trade balance may not improve by much.

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