The Dire Picture Under The Declining U.S. Trade Deficit

Includes: BNO, CRUD, MA, V
by: Katchum

The trade deficit numbers are out for June 2013 and have been very positive. Due to an oil boom, the trade deficit shrank 22% from around $44 billion in January 2013 to $34 billion in June 2013.

As you can see on Chart 1, the decrease in deficit was due to an increase in exports (red chart) and a decrease in imports (blue chart). This looks very promising, but I want to show that not all is well if you look into the details.

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Chart 1: Import Vs. Export

Let's look deeper into these import and export numbers. Chart 2 gives the breakdown of the export numbers. The largest segments are "machinery and transport equipment", "chemicals and related products" "mineral fuels and lubricants" and "re-exports".

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Chart 2: Exports January 2013 (Billion USD)

Chart 3 gives the breakdown of the import numbers. The largest segments are "machinery and transport equipment", "mineral fuels and lubricants", "miscellaneous manufactured articles".

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Chart 3: Imports January 2013 (Billion USD)

From these numbers we can deduct that the oil industry is indeed a very important segment that will influence the import and export numbers.

If we then further look at how these numbers evolve in time from January 2013 till June 2013 we have charts 4 and 5.

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Chart 4: Exports (billion USD)

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Chart 5: Imports (billion USD)

When analyzing the trends on charts 4 and 5, there is one segment that is worth noting. We see that exports of petroleum products (which are incorporated in the segment "mineral fuels and lubricants") have been going up, while imports of the same have been going down. The reason for this can be found in the divergence of West Texas Intermediate (WTI) crude oil and Brent crude oil.

If you recall my article on February 2013 about the divergence in WTI and Brent crude oil, you will notice that this divergence has ended just recently (Chart 6). The arbitrage has closed due to the ability to export the WTI crude oil globally. I advised investors to buy WTI crude oil and sell Brent crude oil, which would have been a profitable trade.

Now that this arbitrage has subsided, the consequence is that the U.S. does not have this competitive advantage anymore in exporting its oil to the world. I expect that the export in petroleum products will be flat going forward. The oil boom may come to its end and the declining trade deficit will not last.

On the import side, we see a decline in mineral fuels and lubricant as noted earlier. The reason for this decline in imports can be found in the deteriorating U.S. economy. The real unemployment rate is rising, more and more people are on food stamps. People just cannot afford using their vehicles and as a result will use less fuel. In fact, there is a lot of evidence that we are almost broke. And these declining import numbers suggest that.

First off, the savings rate is at an all time low (Chart 7, red), due to an increase in tax revenues, which were imposed on January 2013. If we compare the U.S. savings rate to other countries like China's savings rate of 50 %, we can robustly say that the U.S. citizens cannot bear another tax increase at this level.

In fact the net worth of the average person in the U.S. is one of the lowest in the world (Chart 8). Even Italy and Spain have wealthier households than the U.S.

As a result, many people are now starting to use credit to pay for their bills. The best evidence for this is the booming credit card industry. Visa (NYSE:V) and MasterCard (NYSE:MA) have done very well lately (Charts 9 and 10).

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Chart 9: Visa

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Chart 10: MasterCard

On the import side, we also see that car sales in the U.S. are missing expectations. People cannot afford to buy new cars and this is also evident in the declining import in the segment "machinery and transport equipment".


I think that the "oil boom" will soon come to its end and will lead to a flattening export number. Declining imports are a sign that the U.S. citizens cannot afford the goods and services that they need. As a result they use credit in an ever growing pace. The record low savings rate and the limit in taxation will put a damper on the budget going forward. I believe the decline in the trade deficit numbers cannot last for long.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.