Justin Lahart (of the Wall Street Journal's Ahead of the Tape column) correctly called the fall in the monthly trade deficit last Thursday.
But he – channeling Jim Griffin of ING investment management – sees the November fall as the sign of good things to come. I don't.
And when I looked back at my post on the November trade numbers, I realized that my post was both rather dense and stuck deeply in the weeds – all y/y percentage changes and the like. So I wanted to step back a bit and look at some broader trends that underlie my pessimism. There clearly is a debate here: Some folks think the trade deficit has crested, others don't. Look at Macroblog's wrap of the reporting on the trade data. .
So what are the sources of the difference?
Let's start with imports. Lahart notes that US households have been slower to take on debt, "which over time, will mean that spending will grow by less, cutting into import growth and contributing to a narrower trade deficit." Fair point. Though imports are the product of both household spending and business investment, and if Richard Berner is right, capital spending may rise/ business savings may fall. I should also mention the expected rise in the fiscal deficit, which will support spending..
What's my counterargument? If you look at the US data, non-oil imports slowed early in 2005 – for a while there was no month over month or quarter over quarter growth. But they are now are picking up. Jay Bryson of Wachovia has a nice chart showing both the slowdown and the recent pick up.
For a while, non-oil imports were not growing at all, even as the economy and retail sales were. Now, even if the economy slows a bit, I suspect non-oil imports should pick up from its pace earlier this year. This in part reflects a correction in the global electronics business – too much inventory led to slowdown in late 2004/ early 2005, judging from semiconductors. But that correction now seems to be over. Asian exports – and US imports seem to be picking up.
Of course, over time, a sustained consumer slowdown should slow US non-oil import growth. But in the near-term, we may go through a period where non-oil import growth remains strong, as, in a sense, imports catch up with US growth during much of 2005. That at least is the trend I see in the recent pick-up in monthly non-oil imports. A stronger dollar also should, at the margin, shift demand toward foreign products. Toyota is ramping up production; GM is moving the other way.
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