Friday, November 09, 2007

September Trade Deficit

by Bill McBride on 11/09/2007 12:51:00 PM

The Census Bureau reported today for September 2007:

"a goods and services deficit of $56.5 billion, compared
with $56.8 billion in August"
Trade Deficit PetroleumClick on graph for larger image.

The red line is the trade deficit excluding petroleum products. (Blue is the total deficit, and black is the petroleum deficit).

The ex-petroleum deficit is falling fairly rapidly, almost entirely because of weak imports (export growth is still strong). But unlike the previous decline in the trade deficit (during the '01 recession), petroleum imports are still strong.

UPDATE: Petroleum imports are strong in dollar terms, but they appear to be declining in BBLs, see exhibit 17. Imports are noisy month to month, but BBLs imported has declined year over year for the last several months. Also note the price per barrel. This will increase sharply over the next few months (but not to the spot level). Hat tip dryfly.

Normally oil prices would now be falling as the U.S. economy weakens - instead we are seeing margins shrinks for U.S. refiners and record high oil prices. This would imply that global demand for oil is strong, while domestic consumption is weak. This evidence supports the "decoupling" argument: that the U.S. economy could slow, but economic growth in the rest of the World would stay strong. I'm not convinced by the decoupling argument, and my view is that there is simply a lag between a slowing U.S. economy and a slowdown for the rest of the world.

Looking at the trade balance, excluding petroleum products, it appears the deficit peaked at about the same time as the housing market / mortgage equity withdrawal in the U.S. This is an interesting correlation (but not does imply causation).
"Interestingly, the change in U.S. home mortgage debt over the past half-century correlates significantly with our current account deficit. To be sure, correlation is not causation, and there have been many influences on both mortgage debt and the current account."
Alan Greenspan, Feb, 2005
Trade Deficit Mortgage Equity WithdrawalThe second graph shows the trade deficit and mortgage equity withdrawal as a percent of GDP.

Declining MEW is one of the reasons I forecast the trade deficit to decline in '07. And a declining trade deficit also has possible implications for U.S. interest rates; as the trade deficit declines, rates may rise in the U.S. because foreign CBs will have less to invest in the U.S..

Note also that import prices are surging. From Greg Ip at the WSJ:
Import prices jumped 1.8% in October from September and are up 9.6% from the previous year. To be sure, most of that was due to rising oil and natural-gas prices. But even excluding fuels, prices were 0.3% higher from September and up 2.4% from a year earlier.
The import prices problem will only get worse in October and November with surging oil prices and the falling dollar.