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May 10, 2005

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The US monthly trade data will be released tomorrow.

It seems that there is a bit of a gap between the expectations of the team over at Morgan Stanley and the expectations of the blogosphere.

Morgan Stanley, in line with the consensus expectations of the Street, expects a small deterioration in the trade balance.

We look for the trade gap to widen marginally in March, to $61.2 billion, with exports up 1.0% and imports up 0.7%. On the export side, industry data point to a decent rise in aircraft, and services appear likely to strengthen after an unusually flat several months. On the imports side, a sharp rise in oil prices should more than offset some moderation in volumes and lead to another sizable increase in petroleum products. Aside from oil, however, we expect a small decline in imports based on the slowing in domestic demand in March, the sharp decline in North American vehicle assemblies, and a slowdown in incoming port cargo. Note that our forecast trade deficit is about the same as the Bureau of Economic Analysis assumed in preparing the advance estimate of Q1 GDP.

Calculated Risk has looked into the data on petroleum imports, and expects a $5 billion or so increase (higher prices in March than in February) in the US oil import bill. For what it is worth, my not as sophisticated calculations also lead me to expect a similar increase in the measure of oil imports I track. Seasonal adjustment may cut into the increase (February is a shorter than average month), but the US oil import bill should still rise substantially.

That would push the trade deficit up to around $65 billion if nothing else changes.

Morgan Stanley thinks that non-oil import growth will slow a bit and export growth will pick up a bit -- and they toss out all sorts of hints as to why: aircraft shipments, vehicle assembly data, port data, slow US retail sales.

They certainly look at far more data than I do.

But I am not so sure. The basic trend recently has been for non-oil imports to grow far faster than US exports -- indeed, monthly US exports have been stuck at around $100 billion recently, while imports keep on marching up (see the graphs on p. 1 of last month’s trade release, or the data on p.4; both data sets include oil, but oil alone is not driving the trend increase).

And remember, the US economy is not the only economy that went through a soft patch in March. I suspect that the US "soft patch" may slow non-oil import growth a bit in March, but I also would not be surprised if soft patches in Europe and Japan kept US exports from rising.

If overall non-oil import growth slows, it most likely won’t be because of any slowdown in US imports of Chinese goods. China has already reported export growth data for March, and Chinese exports to the US were quite strong.

Count me among those expecting a new record trade deficit tomorrow morning, something in the $64-65 billion range. As always, the key number to watch is the pace of non-oil import growth. Any global rebalancing story requires it to slow.

We will know soon enough.

UPDATE: Well, my expecations were a bit off. There was a big fall in the trade deficit. Evidence that dollar depreciation is finally having an impact? More later.

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