from Follow the Money

Well on our way toward a $900 billion current account deficit …

April 12, 2005

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At least we are if non-oil imports do not slow soon; by my calculations, non-oil imports have increased by 16.2% y/y. That kind of growth in non-oil imports -- combined with already large gap between US exports and US imports -- assures a rapid expansion of the trade deficit.

A $61 billion monthly trade deficit is big.

But watch out for March. I would not be surprised if the March deficit exceeded $65 billion.

Seasonally adjusted Petroleum imports were only $18 billion in February (prices were still relatively low, and petroleum import volumes were relatively weak). The March petroleum bill should be much higher: I agree with Calculated Risk. Look at the raw (not-seasonally adjusted) petroluem data in Exhibit 17 as well as the seasonally adjusted number in Exhibit 9. The raw number in February was around $15 billion. The raw number could easily be $20 billion for March.

And the Chinese new year fell in February this year, keeping this month’s bilateral deficit with China down. Expect the bilateral deficit with China to widen by $2 billion or so in March. Bilateral numbers are not seasonally adjusted, while the overall numbers are. But the seasonal adjustment is not perfect; higher imports from China could well add to the already strong underlying pace of non-oil import growth.

Simple extrapolation of current y/y growth rates for exports and non-oil imports -- combined with oil in the vicinity of $55 a barrel for the remainder of the year -- produces an absolutely enormous estimated trade deficit. $807 billion. That is what 16.2% y/y growth in non-oil imports combined with 10.9% growth in exports does when you already import way more than you export.

That kind of trade deficit would easily push the current account deficit over $900 billion. I still think that is a bit too high, because I suspect non-oil import growth will slow ... but there is certainly no evidence of a slowdown right now. Indeed, if there is evidence of anything, it is a slowdown in exports. Monthly exports have been at $100 billion or so for the past three months, while monthly imports keep on rising ...

The bilateral deficit with China is on track to absolutely explode. US imports from China (January and February combined) grew at a 37% clip. US exports to China grew by a measly 1.6%. Even if the growth in US imports from China slow a bit, and exports pick up substantially, the 2005 US bilateral trade deficit with China looks set to exceed $200 billion, perhaps by a lot. An exploding bilateral deficit with China in the context of a ballooning overall trade deficit is not economically sustainable for long; it also probably is not politically sustainable. Incidentally, US imports from the overall Asian Pacific region rose by 19.6% (y/y) - and that is not a product of high oil prices. Non-Chinese imports from the Pacific rim rose by around 9% y/y. Imports from China are not displacing imports from the rest of Asia.

But lest any one think the US trade deficit is made in China, or just the product of an undervalued renminbi, consider this: the US trade deficit with the Eurozone also continues to grow. US imports from the Eurozone grew by 13.2% in the first two months of 2004, US exports to the Eurozone grew by only 9.9% -- that led the US bilateral deficit with the Eurozone to widen from $10.6 billion in the first two months of 2004 to $12.6 billion in the first two months of 2005 (a $76 billion annual deficit). And no one can accuse sclerotic old Europe of having an unfair cost advantage because of an undervalued currency ...

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