A story that should have been written six months ago? US export growth sure seems to be slowing ….
The New York Times – in a big front page story on Monday– reported that the US trade deficit is about to head down.
The story presumably had been in the works for some time. It is filled with quotes from distinguished economists indicating how the US slowdown combined with strong growth elsewhere in the world – especially in conjunction with the dollar’s fall – is set to bring the US trade deficit down.
Their basic argument makes a great deal of sense. Most of the conditions for an adjustment are in place. If I had been told a year ago that US growth would slow relative to global growth and the dollar would fall to around 1.35 v the euro, I too would have expected an improvement in the trade deficit.
There is just one small problem: the q1 data hasn’t really been consistent with the “adjustment that will bring the US deficit down is about to start” thesis.
US export growth has clearly slowed. Y/y growth is now around 9%, well below its peak at 16% last fall. Haver's data on the 3m and 6m growth rates in real exports show an even sharper slowdown.
And in March non-oil imports jumped up. They are now growing at a y/y pace of around 6%. If those export and non-oil growth rates are sustained – and if oil stays at its March price of $52 a barrel – the US trade deficit would fall, but only by a tiny amount. If non-oil imports grow by 6% (y/y) and if oil is stable, any rate of export growth above 8.5% would bring the deficit down. 9% barely makes the cut.
Unfortunately, the US oil import bill is likely to rise a bit.
Barring a collapse in US demand – i.e. a recession – that pares back non-oil imports, I don’t see strong signs the US deficit is going to fall. At least not in the near-term. Over a longer horizon sustained dollar weakness should have an impact.
Still, the absence of stronger signs of improvement in the trade deficit is a bit of a puzzle.
Before suggesting some potential answers to the puzzle, though, let me present the data in a bit more detail, with the help of a series of charts –The following chart shows US exports (goods and services) and US non-oil imports (goods and services). Non-oil imports have been very flat for the past few quarters. The housing slump reduced US demand for timber and the like. And the fall in US auto production also meant fewer imported parts and the like. That isn’t hard to explain. However, the jump in non-oil imports in March suggests that non-oil imports are starting to grow once again – as one would expect given ongoing consumption growth.
Starting in late 2006, the pace of export growth – the slope of the blue line – looks to have slowed. That is why recent stories highlighting how strong US exports were helping to bring down the US trade deficit are about 6 months too late. Y/y export growth peaked at 16% in September 2006 and has fallen steadily since as the next chart shows.
For a while it looked like strong export growth – combined with lower oil prices – would bring the deficit down. The non-oil balance actually has been stable for some time, and it even looked to be heading down a bit late in 2006.
Alas, both the oil balance and the non-oil balance deteriorated in March. The March non-oil deficit is about as big as it has ever been.
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The deceleration in export growth shows up a bit more clearly in the following graph, which shows the y/y pace of increase in the three month moving average of goods exports (i.e. exports over the past three months/ exports in the three months that ended 12 months ago) and a proxy for the q/q change – the annualized increase in goods exports in last three months over the preceding three months. The q/q change tends to lead the y/y change – as one would expect. And it is still heading down, though perhaps at a slower pace.
I shifted from goods and services exports to goods exports for a reason. I wanted to compare the US data with the Chinese data. Using a three month moving average also helps with the US/ China comparison: it helps smooth out some of the monthly variability in the Chinese data, which isn’t seasonally adjusted.
Chinese export growth has tended to accelerate (and decelerate) in tandem with US export growth. Both countries after all are responding to similar forces – growth in the world and moves in the dollar. Chinese exports though consistently grow faster than US exports.
I think the China v. US export graph highlights one reason why the dollar’s fall v. Europe – and strong global growth – haven’t done more to reduce the US trade deficit.
The falling dollar (read falling RMB) has done more to stimulate China’s exports than to stimulate US exports. The RMB’s fall has also encouraged investment in Chinese export production. Some of that investment perhaps substituted for investment in the US tradables sector.
Basically, the dollar’s move is generating adjustment – but it is generating more adjustment in China than in the US. China’s trade surplus has surged over the past few years, paced by a very large increase in China's bilateral surplus with Europe (and more recently a shrinking deficit with the rest of Asia). That allows China to provide more financing to the US.
A rising Chinese current account surplus and a constant US current account deficit implies a smaller deficit for “Chinamerica.” The system works so long as China’s government is willing to provide subsidized financing to the US.
The other reason for the modest adjustment to date?
Look again at the graph showing the US oil import bill alongside the non-oil trade deficit. The oil import bill is a bit off its highs from last summer, but it is still rather high. At $25b a month, it is also large relative to the non-oil deficit.
In the past, a US slowdown has put downward pressure on commodity prices, helping bring down the US deficit. But right now, strong growth globally is keeping commodity prices high.
That hurts. Especially since imports now account for a growing share of US oil consumption.
Strong global growth helps US exports. But it doesn’t help to bring down the US commodity import bill.
That is one reason why I increasingly suspect that strong global growth alone won’t be enough to bring down the US deficit.
Not so long as the exchange rate channel is blocked by central bank intervention.
Don’t work so much, Brad, we’ll get obsessed all the time.
“Chinamerica” is a well coined word, much better that “Agflation” (a real problem).
Solution: S. Roach has a point. USamericans have to expend less and save much more.
It’s not so dificult. A big tax in gas price would be a good start.
But as Bush will be in charge until next year, to export Wolfowitz and his girlfriend to China could help a bit to compensate the imbalances. This would be a really good outsourcing!
Tnks!
“But as Bush will be in charge until next year, to export Wolfowitz and his girlfriend to China could help a bit to compensate the imbalances. This would be a really good outsourcing!”
If the United States had made the decision in the 1930s to import six million more people like Wolfowitz that nation today would be infinitely richer in almost every conceivable way.
The especial hatred Europeans have for Wolfowitz just goes to prove yet one more time that absolutely nothing has changed on that continent since Dreyfus, Quisling or Salonika.
“It’s not so dificult. A big tax in gas price would be a good start.”
Wouldn’t it be easier if Americans just moved to Greece or Spain?
Wolfowitz should go, not because what he did was corrupt (he was confronted with a difficult, known problem to solve with little experience of the institution and apparently without sufficiently strong advice), but because he is either politically clumsy or financially incompetent.
Despite knowing that there were many who were hostile to his appointment and would be out to get him, Wolfowitz gave his girlfriend a deal with an 8% pay increase per year. Besides this making it difficult for him to cut costs at the Bank, he should have considered the effect of compounding her salary at this rate. She is already paid more than Condi Rice. If Wolfowitz had stayed for as long as he might have liked, Shaha Riza’s salary would have become embarrassingly disproportionate.
Hopefully, when Wolfowitz goes, he can take a few of the World Bank management with him, and the next president can have a clear way to slimming the institution down; then something good will come out of this sorry episode.
For the Electronics Industry in particular, the United States has become a backwater to East Asia. With the exception of some exotic and very specialized manufacturing for the Defense Industry, the commercial electronics industry has already entirely migrated to East Asia. For instance, IBM has relocated its global procurement operations from New York City to Shenzhen China due to the industrial clustering of component suppliers in the Pearl River Delta region. Another indication of the globalization shift is Intel’s decision to construct a $2.5 billion semiconductor fab outside Shanghai. And almost every advanced LCD and Plasma display sold in Walmart is manufactured somewhere in Asia. Currently, China graduates twice the number of engineers than does the United States; moreover half the engineers graduating in U.S. universities are foreign nationals, mostly from China and India. There is simply very little industrial capacity left in the United States that is capable of exporting to the rest of the world.
All well and good as far as it goes. But if oil does go up in price then there is absolutely no chance that the deficit will decrease. And so who is taking any bets and a what odds that oil will actually decrease in price sometime in our lifetimes? Seems to me that the price or oil is a factor that overshadows all other factors, and it is 100% guaranteed to happen and totaly beyond our control.
Dave Chang,
Absolutely right. And when TI had to make a choice of where to put its new $1 billion plant, it chose between the Philippines and China. China lost. The U.S. was never in the running. Multinationals from other developed countries are playing the same game. (Scrap and waste, by the way, is one our top exports to China.)
TI’s Philippine exports accounted for 35-40% of its revenue–and that is before the new plant goes into operation, which is expected to double its Philippine exports.
China did begin to diversify its markets last November, sending less to the U.S. and more elsewhere, especially Europe. Keeping the yuan at least loosely tied to the dollar means that China–and the multinationals–will benefit certainly as much from the dollar slide as the U.S. will, if not more.
Because China may not easily become a prime consumer of finished goods–same with the Philippines–, this game will end unhappily, I think. After all, developing nations cannot all become–and attempt to stay–export platforms. Other developing countries are attempting to compete with China in offering plush deals.
At some point, rich consumers everywhere will tire, not just in the states. I suspect this game has a while to play out, certainly longer than most expected.
Er, Stormy–first China scare stories, now Philippine scare stories? I think the latter is a hard sell. I doubt whether the Philippines qualifies as an export machine and Congress will soon call for trade sanctions on it. First, it runs an overall trade deficit, not a surplus. Second, the bilateral US-Philippine trade deficit was slightly less than $1.2B in 2005 and even smaller in 2006 according to the Philippine Department of Trade and Industry. $1.2B is inconsequential when America’s trade deficit was over $700B in 2005 and 2006. That’s what, 0.2% of America’s trade deficit? Third, be very careful before making statements like this:
Because China may not easily become a prime consumer of finished goods–same with the Philippines
In 2005 slightly over 70% of Philippine GDP was made up of consumption, whereas it was less than 39% in China. Different countries, different stories.
A bit off this specific topic, but has anyone seen this story in the UK Telegraph about Spain’s central bank reserves? It seems to be quite odd.
I wonder if they could consider a private equity arrangment with Blackstone or Carlyle Group.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/05/16/cnspain16.xml
Spain risks crisis over vanishing reserves
By Ambrose Evans-Pritchard
Spain’s foreign reserves have plummeted to wafer-thin levels, leaving the country exposed to a possible banking crisis if the property market swings from boom to bust - despite membership of the eurozone.
The Banco de Espana’s holdings of foreign currencies and gold have fallen to €13.2bn (£9.02bn), equivalent to 12 days of imports.
Over the past two months the Banco de España has sold off 80 tonnes of gold, flooding the world market with enough bullion to dampen the usual spring rally. The bank has reduced its holdings of US Treasuries, British gilts, and other investments at a similar rate.
Total reserves have now fallen by two thirds from €41.5bn in early 2002. Greece and Portugal have seen a similar drop. By contrast, the overall reserves of the eurozone system have remained stable. France (€76bn), Germany (€86bn), Italy (€59.5bn) have all kept holdings at full strength since the launch of the euro.
The Banco de España refused to comment on the sales, leaving it unclear why reserves have fallen so low, or where the money has gone.
i guess massive remittances keep the philippines overall current account in balance.
any thoughts on this week’s economist? it seems to embrace the XRs don’t matter argument whole hog so to speak. rMB Adjustment won’t have any impact on the overall us deficit, since the us won’t save no matter what … no matter that china singlehandely finances (perhaps) about 1/2 the us deficit. strange, the bigger the imbalance, the more insistent the economist becomes about the absence of any linkage …
well, if you look at the calibre of chinese companies (and competition) right now — e.g. lenovo, huawei, haier — it doesn’t look v.impressive… i don’t see them taking over more established brands anytime soon. i’m sure the same was said for toyota and samsung at some point, but until you see some real (homegrown) innovation — in business process or technology — china will remain only a glorified, if extremely massive, export platform for transnationals skilled at sourcing, deft at marketing and just plain better at managing client relationships and expectations, i.e. it’s the service economy, stupid ;P
to be sure, that’s certainly been their development strategy so far (and look where it’s gotten taiwan, or ireland) but continually picking up the pieces of the ‘value-chain’ that no one else wants places china as a perennial also-ran, imo. in other words, the developed world’s crap may look like low-hanging fruit to the chinese, but so far it’s contained precious few ’seeds’ that might legitimately blossom into an industry leader, much less an admired (and/or feared) global competitor…
china’s seeming lack of corporate (fortune 500) ‘champions’ is nothing new (esp wrt india) but then neither is the concept of ‘leap-frogging’ — of doing something different, better and more efficiently than anyone else. so far it’s just been more (lots more) of the same, which isn’t to say that scale doesn’t bring its own competitive advantages, but i’m not sure it changes the game enough to take china to the next tier. so it remains with the world’s factory floor - made in china? sure. invented, designed and developed (and sold in quantity) there? there might come a day, and they’re certainly trying, but i’m just not seeing it yet… maybe i haven’t looked hard enough? baidu, alibaba, ctrip, suntech?
…and maybe they don’t need to, caring more about full employment and social stability? but if china wants to be esteemed on the world stage, commensurate with its apparent ambition to move up the league rankings and reclaim its superpower status, i do not think it can come from manufacturing alone. as china grows richer, i’m sure there will be more need for banking and other services (functioning and impartial legal institutions?) and, in a hopefully more entrepreneurial culture, wider and deeper access to credit and equity markets, which provide better and more immediate feedback (and a reward/incentive system) on a business venture’s viability/prospects. better than the state anyway. oh, and the quality of china’s bread and circuses might finally improve as well. better than cheap disney knockoffs anyway!
Emmanuel,
I am not into scare stories–or China bashing or Philippine bashing or any of the other straw men that some like to create. Point of fact: Philippine average wage is $5.98/day; in metro Manila, minimum wage is $7.40/day. Philippine corporate income tax is only 5% of gross income earned. Philippine import of raw materials and capital equipment is duty free. Philippines supply approximately 10% of the world’s semiconductor manufacturing services. Intel is there, as well as TI. Business decisions are based on such realities.
I suggest you read the comments of Ernie Santiago, executive director of SEIPI. You can find more of the story fleshed out on angrybear.com
As for China, consider the following: approximately 60% of its exports are FDI driven; the percentage is much higher for IT. Stephen Roach used this number about a year ago; Chinese officials have confirmed it. The point is: FDI goes a lot further in developing countries than it does in the U.S., which helps explain why the stock market can do so well even while the U.S. economy is softening.
I would add that pegging the currency to the dollar is effectively a subsidy. In addition, China uses a tax rebate system on exported items. The tax structure supports export-oriented enterprises.
I am always surprised that people are reluctant to recognize how business decisions are made. It is not rocket science. And we do our arguments no justice in accusing people of China bashing or Philippine bashing…or finding other ways of rejecting unpalatable realities.
um, not that i’m an advocate of strict forms of IP protection by any stretch, like i think IP is becoming an oxymoron…
indeed, i think one way china can leap-frog the developed world is by embracing/sponsoring commons-based peer production (not just gold farms) which may not only be philosophically aligned with communism, but chinese culture too
cheers!
The ‘puzzle’ seems quite clear. The US has had it’s manufacturing base hollowed out. Our traditional hi tech industries are mostly off-shore now. It is a national tragedy that under both Democrats and Republicans this has been allowed to occur. We have no industrial policy. China and other countries do. We are not poised well for large investment in Solar Cells, FuelCells (think of what Germany and Japan are doing). Even the manufacturers here procure off-shore for many of the parts that show up in finished products. Who would have thought that entire retial stores (think clothing) sell NOTHING made in the USA. We are in a sorry state to profit from a weak currency. Look at the content of the Boeing Dreamliner. A MAJOR share of the fuselage is now made in Japan versus the current 737/767. How could our trade deficit go down when even the winning products aren’t more than 60% US content anymore! Are any consumer electronics made here????? All those Big Screen TVs high value added (other than Corning’s glass) are made off shore.
Bottome Line:
Free markets when your competitors have a specific LONG TERM policy and objectives won’t always produce the right long term results. Companies buyback stock but won’t invest here as a classic short term trade-off. We built an interstate highway system - what was the short term payback on that? We need to think big again and not fly 40 year old design spacecraft or cut NIH research (bio med we could lose our lead) to pay for Iraq. Viet Nam caused us to blow up our aerospace supremacy. I know. I was in college with all the out of work engineers. NO OTHER COUNTRY WOULD ALLOW THIS.
I’m not an economist or financial analyst. What do you folks think? The answer seems so obvious.