from Follow the Money

September trade: dueling headlines

November 10, 2004

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Monthly exports set a record sounds better than third highest monthly trade deficit ever, or second highest monthly imports ever. All accurately describe this month’s trade release.

The fact that exports set a record is not an enormous surprise. Exports have been growing strongly all year, and that growth will generate monthly records now and again. Right now exports are growing at 13% y/y pace. I still expect that to slow just a bit in the fourth quarter: the impact of the recent weakening in the dollar won’t be felt for a while, and higher oil prices should imply some slowdown in global growth. But I could be off -- still strong global growth and the lagged impact of the dollar’s fall at the end of 2003 might continue to sustain the current pace of export growth.

The bigger surprise is that imports did not also set a record -- at around $149 billion, they were $1 billion below the August record of $150 billion. Monthly numbers bounce around a bit, but buried deep in the release (exhibit 17) is one potential answer: monthly petroleum imports fell by $1 billion, even though the average petroleum price was a bit higher in September than in August. Why -- monthly petroluem import volumes fell (388,500 thousand barrels v. 430,000 thousand barrels in August and a monthly average of 408,000 thousand barrels of oil and related products in 2004). I was expecting oil imports of around $16.5 billion, not $15.0 billion this month, at current oil prices -- because i was expecting higher volumes. There is always some noise in monthly data!

I don’t think there is much evidence that higher prices are curbing oil consumption, so I would expect that the combination of higher oil import volumes and higher oil prices in October (WTI was closer to 50 in October, and around 45 in September) will generate a new monthly import record in October. I think it is a bit too early to conclude that stronger exports are are on track to stabilize the trade deficit. Monthly exports are running about $10 billion higher than a year ago, but monthly imports are running about $20 billion higher than a year ago, so the monthly trade deficit is running about $10 billion worse -- $50 billion and change v. $40 billion and change. I still think we are on track for an annual trade deficit of a bit more than $600 billion in 2004, taking into account the expected impact of higher oil prices in October/ November.

A key number to watch: y/y growth in exports, v. the y/y growth in non-oil imports. Right now exports are up 13% y/y; but non-oil imports are up 14% y/y (Oil imports are up 26% y/y). To stop the deterioration of the trade deficit, exports have to grow substantially faster than non-oil imports. Indeed, as regular readers know, the different sizes of the import and export bases imply that exports need to grow about 50% faster than imports to reduce the trade deficit. We have yet to see exports grow faster than non-oil imports (on a y/y basis), despite the fall in the dollar v. some but certainly not all currencies.

Bottom line: I would be more impressed by strong export growth if it was not accompanied by even stronger import growth, and pay attention to the noise coming from monthly variation in oil import volumes. It helped the US this month, but we should not bank on similar help going forward.

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