U.S. Goods Trade Deficit Rising - Worse, Trade Overall Is Falling, Not A Good Sign

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by: Tim Worstall
Summary

That trade deficits don't matter, goods deficits less and bilateral ones not at all is entirely true.

But a reduction in the volume of trade is a bad idea and we can't blame all of this on Boeing.

This is Trump's trade war coming home to roost, both imports and exports falling. If there is going to be an economic downturn, slowing, this will be the cause.

Why Should We Be Worried About The Trade Numbers?

It's not for the usual reasons politicians like to advance, that's for sure. A good trade deficit isn't something to worry about at all, for there're also services and anyway the whole thing balances out with capital imports. The balance of payments does, after all, always balance. But volumes of trade? Yes, that is something to worry about.

Trade is simply economic activity. The way we define it it's such economic activity that takes place across national borders but at heart it's no different because of that. Economic activity is that economy, is that GDP. Less trade means less economic activity. So, even if we're not worried in the slightest about the balance of trade - Adam Smith insisted there was nothing more preposterous than worrying about that - we are concerned about the volume of trade.

The volume of trade is falling, that's bad. Not terrifying, not yet at least, but this is what we'd expect a trade war to cause, we've got one and it is. Not good therefore.

There's near nothing we can see in the domestic economic numbers that indicate a recession - if one comes it'll be through this trade route.

The Trade Numbers Themselves

It's Census which releases the trade numbers:

US trade deficit

Given that the US has been merrily imposing tariffs on Chinese imports we'd rather expect the deficit to fall. But that China has been imposing tariffs on American exports we might expect that to fall. What happens to the deficit being the balance of the two effects? Given that we buy more from them than they us we'd expect the effect being to narrow that deficit. It isn't. Ooops.

Advance International Trade in Goods The international trade deficit was $72.1 billion in April, up $0.2 billion from $71.9 billion in March. Exports of goods for April were $134.6 billion, $5.9 billion less than March exports. Imports of goods for April were $206.7 billion, $5.6 billion less than March imports.

We're just seeing less trade going on, that's not good.

We Can't Blame It All On Boeing.

When we looked at durable goods orders there was an obvious Boeing factor to take into account:

And what is it that we know about aircraft at present? Well, the big shipper of non-defence aircraft is Boeing, isn't it? Who we know has something of a little problem at present..... Well, quite, who is going to order planes they can't actually use even if they could take delivery? We rather expect a certain hiccup in this number at present therefore.

That's of orders of course. But Boeing (NYSE:BA) is also not shipping those 737 Max planes that have already been ordered at present. That is indeed part of the explanation for the drop in exports. As Moody's Analytics says:

Difficulties at Boeing are likely contributing to the especially large 6.5% fall in capital goods exports. The April durable goods report, released last week, showed a 25% drop in nondefense aircraft orders as Boeing orders came in at effectively zero.

But that only explains, even possibly, that drop in exports and then only a part of it.

Trade Wars Reduce Overall Economic Welfare

How they do this should be obvious. GDP is economic transactions, trade is economic transactions. If we have a trade war which reduces economic transactions then we've got fewer economic transactions, don't we?

As above, we've no domestic economic data showing anything other than just the good times continuing. It's this trade and tariffs thing that could derail that. How it will do so, if it does, if by reducing both sides of international trade, imports and exports.

At the current level, compared to the size of the US economy, this is all pretty trivial. There's nothing that says it will stay that way, it didn't in the 1930s after the Smoot Hawley tariffs after all. This is by far our largest macroeconomic worry at present, the effects of a trade war. The more bombastic we think both Trump and China are going to be the lower we should be thinking the Dow - or S&P - will go.

My prediction is that the stock indices are going to move in lockstep with the varied pronouncements on trade tariffs for the near future. The more tariffs announced - by anyone - the lower the indices. The more backtracking and alleviation of tariffs, the higher.

Disclosure: I/we 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.