How long can non-oil imports remain flat if the US economy continues to grow? (The May trade data)
The basic story in the May data is that nothing much has changed, other than the oil price.
And that in some sense is good news.
Export growth continues at a quite nice clip. Thank you Boeing. Aircraft exports in May were $0.7b more than in April (updated, initially I said 0.5b — bad rounding). And for the year, exports are up $5b – or about $1 b a month on average.
The oil import bill continues to rise. Almost all because of higher prices. The average cost of imported crude was $61.75 in May. Oil import volume in May were a bit higher than in May last year, but in the broader sense of things, volume growth remains subdued. For the first five months of 06, overall “energy related petroleum products” import volumes are down 2% (Exhibit 17).
And non-oil imports have basically been flat all year. May was no exception. Indeed, non-oil imports in May look to be down every so slightly from earlier in the year. Non-oil goods and services imports have been around $155b all year. Non-oil goods imports have been around $127b. January was higher. February was lower (Chinese new year). And May was a bit lower. I was going to try to add in a graph, but Calculated Risk beat me to it.
On the import side, the US economy has already slowed. Though that may be, in part, a reaction to the very fast increase in imports in q4.
Looking ahead, I expect some slowdown in export growth. The first five months have been very, very strong. Take whatever measure you like of exports (y/y increase in three month moving average, increase in first five months of this year over last year, May 06 over May 05). It shows something like 12% y/y igrowth. For that to continue, exports would need to average $123.2b in the fourth quarter – up from 118.7b in May and $116b in April and March. That is possible, but there are some risks that export growth may slow down a bit later in the year.
And I wouldn’t expect non-oil imports to remain totally flat if the US economy continues to grow. Some pick up – say to $160b a month by the fourth quarter – is to be expected even if the economy does slow.
In sum, I would not bank on the second half of the year being as good as the first half once you take oil out of the picture.
I also don’t want to deny the recent improvement in the non-oil trade balance It certainly has improved. Look at Exhibit 9. May 2006 was better than September 2005-January 2006. And even a bit better than May 2005. It now looks like the non-oil deficit blipped up (or down) in the fourth quarter, and then started to come down.
But I also don’t want to exaggerate the improvement. The non-oil deficit is still substantial – around $45b a month. And I am not sure how much longer non-oil imports can remain flat.
Another way of making this point. So far this year, US exports (goods and services) have averaged $116b a month, and there looks to be a slight upward trend. US imports (goods and services, including oil) have averaged about $180b a month in the first five months of 2006. At this point last year, average monthly exports were around $103.5b, and imports were around $160b. That is another way of saying the overall balance got worse.
Now net out oil. Average monthly imports were around $141.6b in first five months of 2005. And $154.7b in the first five months of 06. In percentage terms, exports grew faster than non-oil imports on a y/y basis. But in dollar terms, both exports and non-oil imports are running about $13b a month higher.
But all the growth in non-oil imports came in the tail half of 2005 – not in 2006. So right now, the monthly trend suggests further improvements in the non-oil balance (and probably a bit more bad news on the oil front). Forecasts for the year depend on whether that trend can be sustained. My bet is still no. But if there isn’t something of a rebound in monthly non-oil imports soon, I’ll have to start changing my mind.
A final set of points – US goods exports to the Pacific rim are growing faster (14% y/y) than US goods imports (11.5%). And US goods exports to China are growing faster (up 36% y/y) than US goods imports (up 17%).
But note three things:
- One, US exports need to grow more than twice as fast as US imports to keep the overall deficit with the Pacific Rim from deteriorating. And with China, exports need to grow five times as fast. Neither is happening. The base is bad.
- Two, US imports from the Pacific Rim are growing faster than nominal US GDP. China is not just taking market share from elsewhere in Asia. Overall imports from Asia are rising faster than US GDP.
- Three, I suspect a lot of the downside risk to US export growth comes from the possibility that the current surge in US exports to China won’t be sustained – at least not at its current pace – for the entire year. China bought a ton of Boeings in the first part of 2006. Hu was visiting the US and stopped by Seattle for a reason. I suspect Boeing will ship a lot of Boeings in the second half as well. But keeping up the current pace of growth requires shipping more Boeings in the second half of the year than in the first half. I don’t know Boeing’s production schedule, but my guess is that may be hard.
Another thing to watch – some of the growth in US exports to China has come because electronic goods that formerly were assembled in Taiwan are now assembled in China. So some chips that used to be exports to Taiwan are now exported to China. US exports to Taiwan are down y/y. The overall effect of this is small (exports to Taiwan in the first five months fell by about $0.9b, exports to China rose by $5.7b), but it is important to remember that changes in the location of final production don’t just change more than just the final location of US imports. They also change the direction of some US exports.
Thank you for explaining your views with such great clarity once again.
Boeing’s June orders jumped 102 to 135.
For once, I am (slightly) more optimistic about the US trade balance. Some have called for a cooling down of the pace of deficit growth from recent years. While I certainly don’t expect it to level off (imports are some 50% larger than exports), I can see signs that it may grow more gradually.
Don’t underestimate Boeing. It might garner an even larger share of commercial aircraft sales as Airbus is having teething pains bringing new models to market (and perhaps gambled on the wrong strategy with the A380 versus the 787).
Brad and Emmanuel–Boeing is really contributing to the booming US exports, because it has made wiser decision to supply fuel efficient planes than Airbus, which had opted for fuel inefficient planes like A380, and is gaining market share in expense of Airbus. However, this means that Boeing sales are rapidly increasing because of high oil prices, which may eventually reduce plane sales worldwide. So, apart from its small scale compared with the total US trade deficit, Boeing cannot sustainably solve the deficit problem.
1.
“some of the growth in US exports to China has come because electronic goods that formerly were assembled in Taiwan are now assembled in China. So some chips that used to be exports to Taiwan are now exported to China. US exports to Taiwan are down y/y.”
Could you elaborate on this, especially taking into account that the US trade with Taiwan a year ago was -$4.544 billion whereas in May 2006 it was only -$1.432? If the US exports to Taiwan went to China, the US exports to Taiwan would cereris paribus fall. But the US deficit with Taiwan went down too. So the US imports from Taiwan must have really really gone down.
2.
With many surprises on the good side, the Americans imported petro products as much as $28 billion in value, the highest ever with the price per barrel in May being $61.74 (Bloomberg). We all know the oil price is still rising as of June and July; hence, this could mean that the imports of July and August may still rise even if the exports continue to suprise bears.
3.
The good side. Many economists such as Dr. Roubini and Dr. Joseph A. LaVorgna of Deutsche Bank aruge that the US 2nd quarter GDP growth will be as low as 2.5% due to the decline of the Americans’ consumption. The record obviously shows that the US imports from abroad has dropped, or at least not risen. Hence, the Americans’ consumption this year must be more domestically-oriented. That leads me to believe that the US GDP growth in the second quarter is not as low as 2.5% but higher.
4.
Exports in May rose 2.4% where as imports rose 1.8%. If it wasn’t for the dollar change, the nominal deficit would not have even risen (Daiwa).
kz — you are right, trade probably won’t subtract from gdp growth in q2, which will, all other things being equal, push up GDP growth. that tho is not my area, so you might want to pose your question directly to Dr. Roubini. I also agree with your point that oil imports will continue to rise a bit further in value terms. the wildcards are non-oil imports and exports.
re: Taiwan. As electronics assembly migrates to China, the US is exporting less to Taiwan (say fewer pentiums) and importing less from Taiwan, and importing and exporting more from China. It so happens that the fall in imports has been bigger than the fall in exports, so there has been a fall in the US trade deficit (bilateral) with Taiwan, as well as a rise in the bilateral deficit with China. The overall deficit with east asia is rising as well, tho not as fast as in some past years b/c of relatively strong us export growth to the region.
re: Boeing — yeah, they are doing well. but right now it is more 777s than 787s that are driving the numbers (777 is taking market share from A 340). advance orders for 787s look good. But presumably exports of 4s will fall over time in the face of the A380 (either that or Airbus really loses $$$$). The question i have is really as follows. Boeing’s h1 06 production must have been substantially higher than its h1 05 production. and of that production, far more was exported. but how much higher was h1 06 production than h2 05? and how much room is their for Boeing to ramp up production (or increase the fraction of production that is exported) in h2 06? i.e. what will the h2 06 v h2 05 numbers for exports and total production look like.
http://www.briefing.com/common/images/content/pagecontent/BondMarketUpdate/20060712100734712boe.gif
Brad,
Nice post.
I wish, though, that you go a little further with the explanations of what the trade data and other data sources actually indicate.
It’s U.S. businesses that are driving the primary growth in U.S. non-fuels imports at this time. And some of that import growth is tied directly to U.S. exports production. I believe that this point is seldom addressed.
A post that focused on separating the growth of imported consumer goods and food products from other non-fuels imports would help clarify this matter to some degree.
I believe that if you had extensive experience in U.S. manufacturing and/or global source procurement some of your posts would be framed differently. The level of foreign-sourced materials and components supporting many U.S. domestic operations is fairly astonishing.
Calling for a reduction in U.S. imports is a double-edged sword. If the result is that we cripple or significantly reduce U.S. business activities, then such a call isn’t very smart.
Under existing trade policies and practices, our only hope is to grow the global share of U.S. exports, not shrink U.S. business activities across the board.
May 2006 Data
U.S. INTERNATIONAL TRADE IN GOODS AND SERVICES
BEA
Released 12 July
Main Link
Full PDFRelease
Let me take a moment to readdress recent claims of financial analysts, economists, and others regarding overconsumption of consumer goods (primarily foreign-sourced) as relates directly to U.S. imports growth. Such claims are not supported by the facts. The retail sales data doesn’t support such claims nor does the international trade data.
As evidenced in Exhibit 6, Exports and Imports of Goods by Principal End-Use Category, automotive vehicles and consumer goods imports are not the major source of U.S. imports growth. Automobile and consumer goods imports are down. For that matter, foods, feeds, and beverages imports are down.
Shifting to Exhibit 8, Imports of Goods by End-Use Category and Commodity, the details offer a better explanation. The monthly data from April to May is mostly negative. Even if one does a year-to-date comparison with 2005, it’s clear that there is not much growth in consumer goods spending. Note some of the negative end-use categories on a year-to-date comparison basis.
As stated in the BEA summary at the main link above:
“The April to May change in imports of goods reflected increases in industrial supplies and materials ($3.4 billion) and capital goods ($0.2 billion). Decreases occurred in automotive vehicles, parts, and engines ($0.5 billion) and foods, feeds, and beverages ($0.1 billion). Consumer goods and other goods were virtually unchanged.”
“The May 2005 to May 2006 change in imports of goods reflected increases in industrial supplies and materials ($11.8 billion); capital goods ($3.4 billion); consumer goods ($1.3 billion); automotive vehicles, parts, and engines ($1.1 billion); foods, feeds, and beverages ($0.5 billion); and other goods ($0.1 billion).”
“For the three months ending in April, the average trade deficit was $62.6 billion, reflecting average exports of $115.2 billion and average imports of $177.9 billion.”
The current overconsumption of consumer goods argument as relates directly to U.S. imports growth falls flat on its face.
Don Kohn: “The United States as a whole is spending much more than it is producing. Saving rates are especially low in our household and federal government sectors–both of which are spending more than their current income.”
re: “both of which are spending more than their current income”
might one problem be that (perhaps a great deal of) income has not (yet?) been reported?
Bradm can you tell me why no one in economics/finance seems concerned about the situation in Mexico?
The attitudes on both left and right, especially the right, seem to be hardening into a kind of blind anger that suggests to me serious consequences are to follow. I would put the chances of Mexico drifting into civil disorder at 30% and open insurrection, a notch below civil war, at 10%. My SWAG (well, WAG, anyway) says oil will be in the latter case $80/barrel and the additional growth effect due to trade will be -2%.
In other words, this could be a trigger event that tests the financial system.
And no one is interested?
Charles at MercuryRising
http://www.phoenixwoman.blogspot.com
Movie Guy,
Chuck Grassley slipped a little noticed provision into a bill in May that is probably going to kick US exports in the teeth over the next year or two. After the House and Senate turned down his amendment, he slipped it into the conference committee (House & Senate, to work out the differences between the two bills).
What was it? A massive tax hike for Americans living abroad, and one that is retroactive to January 1, 2006.
With a secret stroke of the pen, he single handedly undermined US export competitiveness.
.
DOR,
Why has Chuck Grassley been pushing that issue?
Admittedly, having returned to the U.S. long ago I haven’t paid much attention to that move. But I did notice your previous remark a week or so ago.
re: “might one problem be that (perhaps a great deal of) income has not (yet?) been reported?”
you mean the latent/unrealised appreciation of dollar assets that americans can lever up?
Don Kohn: “The second force affecting global imbalances has been the continuing strong demand for dollar assets, without which exchange rates and other prices already would have adjusted to limit the growth of the imbalances… Private investors apparently perceive opportunities for relatively high returns on dollar assets in light of the more rapid growth of productivity in the United States than in many other industrialized economies. The attraction of dollar assets likely also is enhanced by the liquid nature of the markets in which they trade and because as collateral these assets are protected by the rule of law and have been a safe haven in times of stress.”
Is Housing Wealth an ‘ATM’? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates
Closing a trade gap is as much psychological as it is physical.
Airplanes alone cannot do the trick. China is going to become the second largest maker of automobiles according to this op-ed piece on Econbrowser (http://www.econbrowser.com/archives/2006/07/china_roars_int.html), can airplanes like building ships be that far behind?
What did McDonnell Douglas get from its failed JV in China except a shotgun wedding with Boeing?
“A failed joint venture in China was a major cause of McDonnell Douglas’s downfall, as chronicled in Joe Studwell’s book The China Dream. He describes McDonnell’s returns for two decades in China as “40 Sino-US marriages among its staff and untold embarrassment.”" (Source: http://www.answers.com/topic/mcdonnell-douglas)
They backed the wrong horse or the wrong aviation ministry in this case.
Ditto for CANDU Reactors from Canada. Great idea to sell reactors to emerging markets. The Chinese signed a deal for ten, if Canada would build a prototype? Yep, they built the prototype, and then Beijing decided they did not have the money to buy the other nine reactors, but thanks for the technology.
“By 1995, Canadian taxpayers had put $13 billion into CANDU reactors, and AECL is soaking up about $200 million a year in subsidies. The Canadian government has tried to get some of that money back by selling CANDU reactors to other countries.”
(Source: http://www.findarticles.com/p/articles/mi_qa3695/is_200003/ai_n8893285)
Typical Canada! Maybe Bombardier can help the Chinese build some planes, too? With export financing from Canadian taxpayers, of course! ; – )
Given strengthening trade ties between China and Brazil, can it be long before China invites Embraer to help set-up a factory in China with the inducement of a fat order book once things get going? Hmmm?
Movie Guy,
The most popular explanation these days for why someone does something like what Sen. Grassley did seems to be “He hates America”.
Honestly, I don’t know. His stated excuse is that Americans abroad are getting a free ride from domestic taxpayers, which doesn’t exactly fit. Americans abroad don’t use the same kinds or amounts of government service as US residents, and more important, we compete on an international playing field where virtually no other nation of economic significance taxes citizens abroad at all.
.
re: “Closing a trade gap is as much psychological as it is physical.”
Might say more political than psychological.
You left out Nortel! and then there is Worldcom, and Enron, which have their own China connections, along with some Canada-US and US-UK relations (NatWest Three on extradition flight http://www.guardian.co.uk/enron/story/0,,1819395,00.html).
“…Yet today both market-based electricity pricing and high-yield bonds are staple instruments of the financial world…” http://www.ft.com/cms/s/19197600-103d-11db-8f6f-0000779e2340.html
“Airlines are set to pump $2.6 trillion (£1.4 trillion) into buying new commercial jets over the next 20 years, aerospace group Boeing has predicted… with fuel costs growing many carriers are expected to update their fleets with more fuel efficient planes… The fast growing Asian market is expected to lead demand for new aircraft – taking a 36% share of the forecast $2.6 trillion market. Strong demand is also predicted from emerging markets in Latin America, the Middle East and Africa… ” http://news.bbc.co.uk/2/hi/business/5175010.stm
“…Consider a Business Roundtable study, using data that Mercer Human Resource Consulting collected on 350 major companies. The idea was to examine median CEOs — those in the middle — as typical. Here’s what the study found: From 1995 to 2005 median CEO compensation at these companies rose 151 percent, from $2.7 million to $6.8 million (the figure included base salary, bonuses, stock options and other “incentives” – but not pensions)… In the same period, the median sales of these companies increased 51 percent, to $7.6 billion, and the median profits 126 percent, to $591 million… CEOs… are slowly becoming a threat to the very system they claim to represent.” http://www.washingtonpost.com/wp-dyn/content/article/2006/07/12/AR2006071201871.html
… with fuel costs growing many carriers are expected to update their fleets with more fuel efficient planes… *
That’s if they don’t go bankrupt because of less consumers. Besides, I dunno about you but on this list of wonderful countries with beautiful sights and high potential, where would you go as a tourist or a businessman :
iraq
iran
syria
liban
israel
india (especially cashmeere)
afganhistan
somalia
mexico
ivory coast
zimbabwe
tchad
OK there has always trouble around in the world. These days there just seem to be a bit more of it.
I’ll be going in India for vacation near cashmeere next month …
A380 is rather fuel efficient from what I head. If it can lower costs it may be a winner. But anyway building zeppelins would be wiser.
re: “if they don’t go bankrupt because of less consumers”
It’s my impression that cargo frequently pays a good chunk of the bill on flights that carry the masses. If the trend is towards more, smaller planes carrying fewer people, have to wonder how many may be private.
Hope you share a few India stories with us. Sounds like its stock market remains optomistic in spite of this week’s happenings.
“I’ll be going in India for vacation near cashmeere next month …
”
Bring us back a sweater, too ; – )