from Follow the Money

Trade data — from both sides of the Pacific

January 10, 2007

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I won't belabor the point, but China's 2006 trade surplus rose to 177.5b (the December surplus was $21b) -- as most, but not all, expected.    December y/y export growth fell back from its torrid 30% plus pace and was "only" 25% -- y/y import growth was also "only" 13.5%.   There isn't much in the Chinese data that leads me to think that China's trade surplus (custom's basis) won't continue to grow.    As Kent Yau notes, China is making more and more of the components that go into its exports: "the trade figures reflected China's progress up the value chain as companies were now able to produce more of the parts they used to have to import. "Now, obviously, they have the know-how and they have the investment, they have the technology -- they can make the components themselves."

The surge in Chinese export growth in q4 is also in the US data.   The overall US trade deficit with China fell in November, but that is a seasonal thing.    The US always imports more from China in October than in November.   Pre-holiday stock building. 

On a y/y basis, US imports from China were up 23.8% in November -- that's an acceleration from the 18.2% increase in US imports in the first 11 months of 2006 relative to the first 11 months of 2005.   As a result, the US data more or less confirms the Chinese data showing an increase in the pace of Chinese export growth over the course of the year.

The overall US trade deficit was basically flat in November relative to October.  That seems true across the board -- exports were up a bit, but not in a super-impressive way, overall imports were up, but not by much. Oil imports were more or less flat.

I still think that there are some other interesting stories buried in the data.   Obviously the biggest reason why the deficit is lower in the fourth quarter than in the third quarter is the fall in oil prices (oil alone should reduce the goods and services trade deficit by $20b this quarter).   But oil import volumes were quite weak in November (look at the data on the real trade balance).  For the year, oil import volumes are down 1.7%.  

Relative prices matter.  If something is more expensive, Americans do buy less of it.  That point is also relevant for the debate on China, I think -- though many disagree.

The headlines that I have seen have emphasized "record" US exports in November.  That is true.   On a y/y basis export growth is still very strong -- up 13.4%.  But I see signs that the pace of export growth is slowing.  From June 2005 to June 2006, monthly US exports rose from $106b to $121.3b -- an average monthly increase of over a billion.   The recent export data series doesn't show a comparable rate of increase, though exports are still growing: 122.8, 123.4, 123.6, 124.8 -- I'll put a chart up in a bit, but the slowdown is pretty clear in the graph on p. 1 of the BEA's release.

Boeing's 2006 exports, incidentally, are up $10b through November.  One reason why I don't see continued fast export growth is that I don't think Boeing will be making many more planes in 07 than in 06, and it already is exporting about as high a share of its production as is possible (almost all widebodies are exported).   Auto imports, incidentally, are up $16b through November ...

What really matters for long-term adjustment, though, is the pace of non-oil import growth.  Non-oil imports have been around $132b for the last three months.    The absence of growth on a m/m basis is consistent with a US economy that isn't growing all that fast -- or perhaps with a bit of an inventory correction.  On a y/y basis, November non-oil imports are up 7.7% (the average of the last three months is up 8.1% v the comparable period in 2005).  That is about in line with the increase in nominal GDP, and significantly slower than a few years ago. 

In broad terms, then, I see evidence that US export growth is slowing (from a very fast pace) and that non-oil import growth has slowed in the past few months (but that may not be sustained if the US economy reacclerates) .  The overall trade deficit for q4 will be better than the q3 deficit, but mostly because of the fall in oil prices.

But if non-oil import growth continues at around 7% (with imports from China rising far faster) in 2007, and export growth decelerates to around 10% -- that is a story consistent with a stable (slightly growing actually) trade deficit over time.  If non-oil import growth is around 7%, export growth needs to be above 11% to really lower the deficit.  Unless the pace of export growth reaccelerates, that seems like a stretch. 

A stable overall deficit likely will come from a growing US deficit with Asia, combined with a shrinking US deficit with Europe and the NAFTA countries (November 2006 imports from NAFTA countries were the same as November 2005 imports ... and the US imports a lot of energy from Canada/ Mexico).   Exchange rates do matter.

And, as I constantly emphasize, a stable trade deficit and rising net interest payments implies a still-growing current account deficit.

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