from Follow the Money

Relative prices do matter

October 13, 2005
1:08 pm (EST)

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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That is the message hidden inside the August trade release, which showed the US monthly trade deficit widen to $59 billion, as expected, on the back of a higher oil import bill.

Oil imports - measured by volume - have increased only 1.6% this year, compared to 5.7% in 2004 and 7.3% in 2005.  I guess folks are listening to the President, and putting on their sweaters, so to speak. 

US exports to Canada are growing by 12%, to Europe as a whole by 11% and to the (sclerotic, no growth, pick your nasty adjective) eurozone by 9%. (Corrected, earlier I had 5%, the Pacific Rim number here by accident) .

US exports to the Pacific Rim, by contrast are growing only by 5%.  Exports to China are up more, by 17%, but that may just reflect the shift in assembly of electronic goods with US made components to China.   US exports to the rest of the Pacific Rim are up only 3%. 

US exports to the OPEC countries - where the US competes with Europe - are up a whooping 47%.   All data is from the BEA

What is the likely explanation for the increase in US exports?  

Simple.  Falls in the dollar work with a lag, and US exports to these regions - not necessarily the fastest growing economies of the world - are benefiting from the weak dollar at the end of last year.    The revival of demand for Boeing planes also clearly helps - though be ware, it seems like Boeing only shipped two planes in September, so aircraft exports next month are expected to be weak. 



The other story continues to be the absence of any growth in non-oil imports.  

That too may reflect the lagged impact of dollar weakness.  US imports from China - a country that joined the dollar in depreciating against the world from 2002 through 2004 - continue to increase rapidly.  Imports from China (ytd) are up 26% y/y, and imports from the Pacific Rim are up 13%.  Recent monthly data though does suggest that the pace at which imports from China are increasing is slowing slightly - think low 20s rather than high 20s.    Imports from other regions are lagging a bit.    More spending on gas also means less to spend on everything else.

Year to date, non-oil imports are up by 10.4%, that is, non-oil imports through august 2005 are 10.4% higher than imports through august in 2005.  But all that growth reflects a surge in imports (a huge surge) at the end of last year. 

Non-oil goods and services imports in January: $144.2 billion

Non-oil goods and services imports in August: $144.6 billion 

If only the US petroleum import bill (seasonally adjusted) had not increased from $16.6 to $22.6 during the same period ...

August exports were over 12% higher than August exports a year ago, and August non-oil imports were only 7% higher than a year ago.  If that is sustained, such a differential would be enough to at least stabilize the non-oil trade deficit.     

Of course, oil import volumes will pick up over the remainder of the year to offset the impact of the Gulf coast hurricanes - so oil alone is likely to drive the deficit higher.   Add in a weak September for Boeing and disruption in agricultural exports through New Orleans, and I suspect September exports will be kind of weak - and maybe October too.

So I still expect a trade deficit of a bit over $700 billion, and a current account deficit of a bit over $800 billion in 2005.    And I continue to be on the lookout for some indication that overall non-oil import growth is starting to pick up again.   I thought the "stall" in non-oil imports reflected an inventory correction, but that inventory correction is now lasting a bit longer than I expected.   UPDATE.   Check out the comments by DOR, which show that non-oil imports surged relative to sales in 2004, and now are starting to almost lag.

Still, I don't think "zero" growth in non-oil imports is consistent with a growing US economy, particularly now that the dollar is rising, not falling.  And a $1.20 dollar/euro should start to have an impact on US exports next year.  Right now, we benefiting from the dollar's fall at the end of 2004; next year, we will see the impact of the dollar's rally in the middle of this year.

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