Trade Deficit Improves, but for All the Wrong Reasons

I have not delved into the intricacies of this trade report since it's not one of the more important things I follow - for so long it's just been a huge number that we shrug off as status quo. We buy much more from people outside the country than they buy from us; that's the new and innovative economy we've built. Hence I don't know all the 'seasonal adjustments' or whatnot that may or may not be done with it, but I would assume there is not much to fudge in this report.

Some sum of goods is valued as going out of the US, and some sum of goods is valued as coming in. The difference between the two is either your deficit or your surplus. We've run huge trade deficits for as long as the eye can see - essentially absorbing far more than we export out. This has been part of our structural problems in the country.

First the green shoots - this deficit has shrunk dramatically the past year. Now for the brown manure - it's for all the wrong reasons. We'd want exports surging (meaning people want stuff we make) to be the primary driver of this shrinking trade deficit. Instead, a massive falloff in imports is the reason, which speaks to the absolute weakness in both the business and consumer economies. There is an eye- opening drop in demand for things outside the country as businesses "make less" and consumers "shop less". Imports are down 35% versus 1 year ago... that is just incomprehensible for an economy of this size.

Now remember, almost every country in the world depends on the US consumer to "shop like there is no tomorrow" for part (or in some cases, much) of their growth. So this has implications not just for us, but for the entire world. The whole thesis of export led growth by China, Germany, and a host of other countries seems implausible until you get to work people. By work, I mean get to the mall and "do your thing".

• The U.S. trade deficit fell to the lowest level in more than nine years in May as exports posted a small gain while the weak American economy pushed imports down for a 10th straight month. The Commerce Department said Friday the deficit narrowed to $26 billion, a drop of 9.8 percent from April and the lowest level since November 1999. Economists expected the deficit to widen to $30.2 billion in May.
• So far this year, the deficit is running at an annual rate of $350 billion, about half of the $695.9 billion deficit for all of 2008. Economists believe that trend will continue as weakness in the U.S. depresses demand for imported goods.
• The big improvement reflects the prolonged U.S. recession, which has sharply reduced American demand for imported goods. U.S. exports also are down from last year's peaks, hurting American manufacturers, but those declines have been smaller than the plunge in imports.
• America's deficit with Canada, its largest trading partner, dropped to $628 million, the smallest monthly imbalance in 15 years. The deficit with Japan shrank to $1.9 billion, the lowest deficit with that country in more than two decades.

Now again, we have to thank our lucky stars that (a) we have so much fertile agricultural land and (b) we have not found a way to export said farmland to other countries where wages are far lower - because if they could, they would. Thus far they have not thought of a way, so we still benefit from the farm products - one of the last great exports we can count on. That said, our exports are still down 25% from a year ago, so only partially balancing the 35% drop in imports. All in all, global trade has really shriveled.

• Exports of goods and services rose 1.6 percent to $123.3 billion in May, reflecting increased sales of soybeans, corn and other farm products, along with higher exports of industrial machinery, generators and computers. But even with the May increase, U.S. exports are 25 percent below the record-high set in July 2008.
• Imports edged down 0.6 percent to $123.3 billion, the 10th consecutive monthly decline. Imports are 34.9 percent below the all-time high set last July.

Comments

[Ryu Mei Co:]

My company does export and import and I know Japan's trade surplus to US is also improving on the wrong reason. The US trade deficit is real, and Japan (and all the other trade surplus nations with US) should be worry but they are not. Even in Japan, markets are in self-delusion phase and expect US consumers to save the day. I wonder what will happen when avg Japanese realized that US consumers turn frugal and Toyota continue to turn up weaker than expected auto sale numbers, and Sony cant sell their PS3.

Today, Japan Government upgraded Japanese economy despite Japan LDP lost and the continuing of Japan trade surplus stabilizing but shrinking. How crazy is that? You do not have to take my word for it, as long as you think US consumers are not spending, most Japan export related companies are doom.

Jul 13 05:54 AM

[John Galt:]

I'd like to how what percentage of our imports is foreign oil as I don't follow the trade deficit as much either.

Also, when you have a conversation about the trade deficit... (isn't it funny how it's not trade balance, but it's ALWAYS a trade deficit) you also must talk about the value of the dollar.

Jul 13 08:05 AM

[Dave Wrixon:]

The bottom line is that if all imports have dropped 35%, the American consumers have either become very patriotic or the US GDP figures are a complete load of horse shit. I am really to believe that rather than looking for best value which will almost certainly be the import due to recent inflated dollar valuations, people are actually checking the labels on everything to see where it was made? Because if they aren't then the Commerce Department is lying to every one big time! The trade figures themselves must be correct because they are mirroring the experience of the exporting countries, but something stinks.

Jul 13 08:36 AM

[user8240:]

While the view that Americans are cutting consumption on imports because of the economy is considered by Trader Mark as a "wrong reason", its actually a very good result. After years of no savings spurred by Greenspans wealth effect, we are finally forced to confront the reality of wealth destruction by cutting spending. The consequence will, in the long run, promote lower interest rates, capital investment, and self-financing of economic recovery.
BTW, what happened to the picture of the Chinese guy in the cowboy hat?

Jul 13 11:18 AM