Brad Setser: Follow the Money reports that bad news is hidden in US's trade data.
(emphasis mine) [my comment]
The bad news hidden in the good news (today's trade data)
Posted on Friday, March 13th, 2009
By bsetser
The US January trade deficit fell to $36 billion. That is as low as it has been in a long time. The petroleum deficit (seasonally adjusted) fell to $14.7 billion — $4 billion less than in December 2008 and $20 billion less than January 2008.
So where is the bad news?
1) The average price of imported oil in January was $39.81. Why is that bad news? Simple: Unless the price of oil tumbles, the monthly US petrol deficit isn't going to fall further. From June to August the monthly petrol deficit was, on average, close to $39 billion. The fall in the price of oil since then consequently has brought the overall deficit down by close to $25 billion. That alone explains most of the improvement in the trade deficit.
2) More importantly, the pace of decline in US non-petrol goods exports now exceeds the pace of decline in non-petrol goods imports. Non-petrol goods exports were down 21.5% y/y in January; non-petrol goods imports were down 18% (Exhibit 9). Relative to August, exports are down more than 28% and imports are down more than 23%.
The data on the United States 'real" trade balance consequently paints a far more discouraging picture. The real balance removes the impact of price changes from the data. The real non-petrol goods deficit was a bit wider in January than in December ($32.8b chain weighted dollars v $31.6b). The deceleration in real export growth has been quite sharp. Real exports were up 10% y/y as recently as July 2008. They were down 9.7% y/y in December 2008. And they were down 19.2% in January.
Real goods imports flat in June 2008 (and close to flat in July); they are now down over 17.6% y/y in real terms. Not only is the y/y fall in exports now larger than the year over year fall in imports, but the pace of deterioration in exports is now more rapid.* 
Net exports subtracted from US growth in q4 for the first time in a long time. That may well continue in q1.
The sharp fall in US exports — and the end of the improvement in the US "real" trade balance — adds urgency to the US call for a larger global stimulus. [Global stimulus won't help. The dollar is overvalued and needs to fall substantially to make US goods competitive again.]
China's Premier Wen has expressed concern - understandable ones, given China's huge holdings — about the safety of China's investment in the US. I would note that buying more foreign goods (i.e. importing more) is an obvious alternative to buying more bonds. And right now the global economy — and the US economy — could use a bit more demand for goods.
Thanks to Arpana Pandey for help on the graphs. Calculated Risk has a set of useful graphs showing the evolution of the nominal trade balance as well.
UPDATE: US exports to China were down 28.6% y/y in January, while US imports from China were down "only" 5.4% [To be expected. The US is as addicted to cheap Chinese consumer goods as it is to oil]. That meant the US deficit with China is actually a bit larger in January 2009 ($20.6b) than in January 2008 ($20.3b) even though the US is importing less from China. The timing of the Chinese new year no doubt pulled the export number down a bit (y/y Chinese imports were way down in January, but they bounced back a bit in February). But the trade data still suggests to me that there was a sharp slowdown in economic activity in China at the end of 2008 that pulled down China's imports. The US exports some commodities to China — as well as things like scrap iron. Falling commodity prices consequently would have an impact. Some US exports to China are also reexported to the world. But the US also exports capital goods to China, and well, the fall there would reflect a fall in Chinese investment demand. I don't yet see the basis for arguing that Chinese domestic spending is going to pull the world out of the current slump [Agreed. Until China de-pegs from the dollar, the yuan's artificial strength will prevent Chinese stimulus from helping the world.]. Not so long as the world's exports to China are falling so sharply.
*Edited
. I initially reversed the y/y fall in real imports and real exports. The y/y fall in real exports in January exceeded the y/y fall in real imports.
My reaction: Even though the US January trade deficit fell to $36 billion, the US trade picture is very ugly.
First the "good news"
1) The US January trade deficit fell to $36 billion.
2) The petroleum deficit (seasonally adjusted) fell to $14.7 billion
Then the "bad news"
1) The average price of imported oil in January was $39.81. WTI oil is now trading around $46, which means that the US's monthly petrol deficit is increasing again.
2) Excluding petrol goods, US exports are falling faster than US imports.
More importantly, the pace of decline in US non-petrol goods exports now exceeds the pace of decline in non-petrol goods imports. Non-petrol goods exports were down 21.5% y/y in January; non-petrol goods imports were down 18% (Exhibit 9). Relative to August, exports are down more than 28% and imports are down more than 23%.
Not only is the y/y fall in exports now larger than the year over year fall in imports, but the pace of deterioration in exports is now more rapid.
3) Despite falling Chinese imports, the US deficit with China has gotten larger.
US exports to China were down 28.6% y/y in January, while US imports from China were down "only" 5.4%. That meant the US deficit with China is actually a bit larger in January 2009 ($20.6b) than in January 2008 ($20.3b) even though the US is importing less from China.
Conclusion: While the trade deficit "improved" in January, a closer look at the trade numbers shows a much bleeker picture. With oil prices rising and US non-petrol goods plunging, the US trade deficit is worsening again, despite falling imports.
For those of you who missed it, I wrote an entry on Why the US Trade Deficit is Worsening a while back:
Durable and capital goods
The US's manufacturing sector is concentrated in industries most vulnerable to an economic downturn, durable and capital goods. Durable goods are products that last for more than three years like SUVs, motor/sail boats, etc. These items are the first areas where consumers cut back spending, which is why the big three are in so much trouble. Capital goods are equipment/machinery used in creating other goods, and the biggest demand for these products has come from emerging markets with their growing manufacturing sectors. With emerging market manufacturing now in contraction, demand for these capital goods is set to disappear, which leaves the US in a disastrous situation:
*** We make mining equipment at a time when commodity prices are crashing and mines are shutting down.
*** We make construction equipment (caterpillars, pickup trucks, etc...) at a time when global construction is grinding to a halt.
*** We make civilian aircrafts at a time when global trade and travel is quickly contracting.
Cheap consumer goods
At the other end of the spectrum from durable and capital goods are the cheap consumer goods found in retailers like Wal-mart. Demand for these lower-end consumer products tends to hold through the severest of recessions, because they are absolutely essential to our modern standard of living. While some current shoppers at Wal-Mart might be forced to cut spending on these essential items, new spending from shoppers who are downgrading from higher end stores will pick up a lot of this shortfall. For example, as more American's lose their jobs, there will be a lot of consumers downgrading from designer clothes to Wal-Mart's cheaper clothing. The resiliency of Wal-Mart sale is bad news for the US, as virtually all the retailer's cheap goods are imports from Asia.
The trade deficit
A quick look at where the US's trade deficit is concentrated reveals just how grim the outlook is. We are running huge deficits in consumer goods and industrial supplies (oil), which we desperately need, and the only category with a sizable surplus is capital goods (civilian aircrafts, mining equipment, etc), for which global demand is crashing. This explains why the US trade deficit grew in October.
The absurdly strong dollar has been steadily destroying the viability of our exports. Of course this is brought about by the global rush to "safety" in Treasuries.
Talk about a perfect storm.
For those holding dollars, the one bit of wonderful news is that just about everything in the world is cheaper for you to buy than anyone else. Domestically, not so much. Gold and foreign real estate come to mind. Americans are getting a 20 percent discount, more or less. So, there's no better time to hedge. With a handicap, even.
On another note, in the BIS paper you discussed in *****European Banks Desperate To Avoid Recognizing Losses On Their 8 Trillion Us Holding***** there was a paragraph that stumped me:
_______________________
"By the way, US banks were net borrowers from the rest of the world – but most of their borrowing came from a few Caribbean islands – and those islands borrowed heavily from “non-bank” counterparties in the US. The BIS doesn’t think this represents a true external flow: “this could be regarded as an extension of US banks domestic activity since it does not reflect (direct) funding from non-banks outside the United States.”
_______________________
Um... what does this mean? Are they talking about Cayman and off-shore accounts held by US nationals? Or am I even in the ballpark?
Thanks, Eric and all who comment. Interesting insights.
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.1 trillion. What will happen when those assets are depleted? Today's recession is the answer.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?
At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.
Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)
Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Pete Murphy
Author, "Five Short Blasts"