Last week’s data flow supported the US adjustment optimists … not the pessimists
The trade deficit fell back under $60b in April — see Jeremy Peters' coverage in the New York Times. The fall in the overal deficit stemming more from a fall in non-oil imports rather than from a rise in exports. That doesn't suggest a strong underlying economy, but it did help the trade balance. The overall balance was also helped by a fall in the volume of imported oil, which offset a rise in the oil price.
The overall trade deficit has stayed close to its q4 2006 levels so far this year — and thus stayed below its level for most of 2006. As importantly, the Fed's flow of funds data didn't show much deterioration in the US income balance. The flow of funds coomes out before the balance of payments data, and covers much of the same ground — though in slightly different way.
The absence of much deterioration is a bit of a surprise, at least to me. The basic logic behind a deterioration in the overall income balance is simple: US rates are rising, and the US should have well over $11 trillion in gross external debt by the end of the year.
Stronger growth outside the US than inside the US should help the income balance, at least the portion of the income balance that stems from dividend payments on direct investment. US FDI abroad should be more profitable while foreign direct investment in the US will be less profitable. On the other hand, if higher growth abroad pushes up US interest rates, that will hurt more than stronger profits on US FDI helps. US gross external debt is far larger than US direct investment abroad.
The US adjustment optimists break into two camps. Some, like Calculated Risk, are optimistic about the prospects for adjustment in large part because they are pessmistic about the US economy. Calculated Risk argues that the rise in mortgage equity withdrawal led to a surge in consumption and imports, and that the fall in mortgage equity will trigger a slowdown in consumption growth — lowering imports and thus the trade deficit.
Others, like Stephen Jen, are optimistic about both the US economy and prospects for global adjustment. They expect the US to pull out of its housing-induced growth slump — but don't expect a reacceleration in US growth to drive up the trade deficit. Strong global demand growth will help the US for once.
Pessimists worry about the evolution of the US income balance, and about ongoing — and somewhat puzzling — signs of weakness in US exports (including weak capital goods exports). The April data didn't really change the story. The q/q growth rate (February-April v November-January) is still falling …
The data in the chart only covers goods. Services exports seem to be doing better …
But there is another set of data that also doesn't paint all that optimistic a picture. For the US current account deficit to fall, someone else's surplus needs to fall. And, well, it is hard to find evidence of such falls.
- The eurozone's current account balance has recently swung back into surplus.
- Japan's surplus is growing, driven by a widening income balance.
- And China's surplus is growing extremely rapidly. The leaked January-May Chinese trade data imply a $22.4b trade surplus for May, and a pace of export growth of close to 30% (Update: the May data has been formally released). That kind of export growth, if sustained, implies a very large increase in China's external surplus.
The oil exporters surplus is falling on the back of a spending and construction boom. And some of the improvement in the eurozone's external balance may be coming from a rise in Eastern Europe's deficit (as well as a falling oil import bill and more exports to the oil states). Some of the rise in the surplus of Japan and China also may be coming at the expense of others in Asia.
But it still seems, at least to me, that the fall in the oil exporters surplus is more likely to be offset by a smaller deficit in Europe and a rise in Asia's surplus than a big fall in the US deficit.
I hope I am wrong. This is clearly the time when the US external balance should be improving.
” For the US current account deficit to fall, someone else’s surplus needs to fall. And, well, it is hard to find evidence of such falls. ”
When it happens, won’t the evidence on both sides be concurrent and synchronized by definition? Correlation rather than cause and effect? Given the size of the numbers, the timing of an inflection point must be difficult to predict, apart from Stein’s law and the Minsky effect. Perhaps the longer it goes, the more probable the pessimistic outcome.
Brad,
Let’s get back to the top down view. Do you think the Fed is making a mistake by not lowering rates (as you Nouriel would like I believe…at least by reading his blog early this year)?
i have much stronger views on fx intervention outside the US than domestic US monetary policy. I don’t follow the US data flow all that closely, and don’t have a strong opinion either way on the fed.
i would note that last week’s bond market move represents a de facto tightening, which may not have come at the best moment of time. so long as the yield curve was inverted, 5% plus short rates were having a more modest impact than might have been expected.
It’s pretty difficult to construct an effective case that the Fed should lower rates when the reported savings rate remains negative and Q2 GDP is tracking to potentially print a 4 handle. Those who have forecast either lower rates or lwoer equity prices on the back of the housing market appear to have committed the common fallacy, at least up to this juncture, of believing that their ‘pet’ issue is not just an important issue, it’s the only issue.
“For the US current account deficit to fall, someone else’s surplus needs to fall. And, well, it is hard to find evidence of such falls.”
Or, somone else needs to go into deficit. As you said, Europe’s current accout is improving right now, but it may turn into deficit later this year. It seems to me that China’s main target right now, is Europe. As the yuan went down with the dollar, it is strongly undervalued vs. the euro. In the ECB monthly bulletin one can see that China’s trade surplus vs. Europe increases steadily, and the reason why the euro area’s current account has a surplus is that this area has a high surplus with European but non-euro countries, most notably with the UK.
macro man — I haven’t been following the US closely recently. What is the basis for the 4 handle for the US in q2? tis hard to turn to NRoubini for the optimistic case on the US ;).
AC — yes, Europe is one candidate for a country with a deficit running a bigger deficit and thus helping absorb more of Asia’s surplus. I agree with the your point about the euro area v broader EU, especially if you include eastern europe along with the uk.
Brad, it’s nothing massively sexy to be honest- net exports and inventories appear to the the primary basis for the higher marginal growth expectation. Consumption is also tracking a bit higher than originally thought a month ago, and I suppose the survey data provides some hope that biz investment will pick up as well. General theme appears to be Q2 gets back what Q1 took away, then we settle down for slightly-beloe-trend growth for the rest of the year.
“As the yuan went down with the dollar” - it is still firmly pegged to the USD - no?
Straddling the last post, I’m wondering about the technical criteria for a nation’s currency to qualify as a ‘global reserve currency’. There seem to be many off-hand remarks about possible candidates without a fuller explanation of just how this would work. I’m also confused about the technical definition of a ‘floating currency’ as there have to be limits to that, especially for economies that are small enough that, presumably, any number of entities should be able to corner the market if ‘allowed’.
As foundations and endowments are often said to be among some of the fastest growing areas of global economic activity - how might flows to and from these entities factor into some of the numbers you track? Doesn’t most of this money originate from funds that would otherwise go directly to governments as tax revenue? And beyond the impact of the capital allocation objectives and strategies of each foundation’s and endowment’s fund managers, the underlying entities are also making rapid developments in the ways they generate revenue and influence global economic growth. What little information I can find seems to indicate that the U.S. has a very strong lead in this area and I’m wondering if or how it may distort the numbers.
…and whether it matters that some of the East European countries that China is targeting have not yet adopted the Euro.
Eastern europe manages their XRs v euro, so the RMB moves v. eastern europe much as it moves v. the euro.
the rmb isn’t pegged to the dollar but it is primarily managed against the $ –
there is no technical definition of what constitutes a reserve currency. it is whatever central banks hold in their reserves. generally, the candidates have had deep liquid markets (b/c reserves were held for a time of need, and you wanted something that could easily be turned into cash) and have fully convertible currencies (for similar reasons). it helps if the central bank of the reserve currency country welcomes the inflow.
but i would look more to practice than to any definitions. maybe the BoR should go to China and say it would welcome some of China’s reserves …
macro man — real imports did come down in april — and may be off their q1 pace– but falling imports is usually not a good sign for broader growth. Real export growth in april wasn’t impressive. clearly one month doesn’t a quarter make and mechanically if you project out april you get a contribution from net exports, but i didn’t see much evidence of economic strength in the april data. i may be hung up on the deceleration of goods exports — which admittedly doesn’t make much sense. but until there is evidence that it is reversing, i have a hard time seeing a sustained boost to the us economy from the export side. and any gains on the import side will likely be offset by losses in consumption/investment (barring a shift in demand toward us goods from foreign goods).
“As the yuan went down with the dollar” - I meant, that they weakened against the euro together.
fwiw, re: eastern europe, i’ll go out on a limb and suggest that bush’s overtures to eastern europe have less to do with ‘missile defense’ than wooing them (back) over into the US’ sphere of influence; so to be clear: missile defense = slush fund…
I agree re: the trend in real trade volumes. However, the trade figure was very substantially better than what most eco’s had in their forecast spreadsheets, and human nature being what it is, the tendency will be to assume that May and June data won’t be terribly far off the April figure. The problem with following curent quarter GDP forecasts on too high a frequency is that a lot of the adjustments are mechanistic, based on replacing individual data forecasts with actual datapoints.
re: reserve currency, i’d go back to chinn & frankel’s study (summarised by macroblog) so it kinda depends on what brown will do (apparently noone knows) in bringing britain into the eurozone, but if jen is right (and so far, as BS admits, he has been) and “[i]nvestors with longer-term horizons may already be treating the UK as a member of the EMU” then EUR is well on its way to qualifying as a ‘global reserve currency’ with all the attendant (exorbitant) privileges that entails…
Brad,
In the paper “Current Account Deficits in Industrial Countries: The Bigger They Are, The Harder They Fall?”, by Warnock & Freund, they anticipate just this sort of narrowing of the trade deficit.
Dale C.
Canada may take a disproportionate hit if/as/when the US slows and C/A balances recover. Strong CAD is already hitting the US non-resource export sector hard. AFAIK, Canada is still the single largest destination for US exports though, and demand for those exports is likely to fall off with a bit of a lag, especially if resource prices soften.
For all intents and purposes, the pound is already a global reserve currency — cb inflows to the pound have been big enough to finance the UK’s Current account deficit for the past several years. no need to join the eurozone. it is better to offer central banks a higher yielding alternative to the eurozone. the euro also is a reserve currency in everyway. total reserve holdings of euros are comparable to total reserve holdings of $ back in 2000, and ongoing cbank flows to the eurozone now are in the $200b a year range — well above CB flows to the dollar in the 90s (when everyone said the $ was a reserve currency). as I keep saying the feature of today’s economy is that cbanks are buying more of every thing, which is even more important than the latest shifts in the relative share of their euro/ $ holdings!
Ah yes, but Canada is “serious” about finding new export markets, although I haven’t seen any mention of what exactly will be imported from Peru and Columbia.
“Federal Trade Minister David Emerson is expected to announce Thursday that Ottawa is wrapping up free-trade talks with four European countries: Norway, Switzerland, Iceland and Liechtenstein, sources say. He is also expected to announce that Canada is commencing similar negotiations with Peru and Colombia… It would also be a sign, however small, that Ottawa is serious about gaining ground in the global race to sew up preferential commercial partners…” http://www.globeinvestor.com/servlet/story/RTGAM.20070606.wtrade0607/GIStory/
weren’t both the U.S. and China very actively investing in Europe when the EUR was considerably cheaper. So wouldn’t part of their on-going interests in that region be in reaping the exchange adjusted returns?
re: “maybe the BoR should go to China and say it would welcome some of China’s reserves…” is there any reason to believe they haven’t?
Guest — not sure what you are suggesting. China has a much bigger share of its portfolio in $ than euros (tho it holds both) so on balance it loses from an updraft in the euro on the financial side. It would rather see the $ rally. and what really matters is the rmb’s path v euro and $, and there, well, China has embarked on a path of near-certain financial losses.
sure the us has an interest in its european investments doing well — the rise in the $ value of US investment in europe has been a big reason why the NIIP hasn’t deteriorated. but americans still have more of their assets in $ than in other currencies, so a fall in the $ reduces their ability to buy into other markets (and go on vacation in europe with their existing assets). Until the US has more non-$ assets than $ assets, it is hard to argue that it financially gains from $ weakness. the net int. position is helped, but not Americans overall …
finally, I would be surprised if a significant share of China’s reserves are in RUB. could be wrong on this, but the RUB hasn’t been among the world’s typical reserve currencies. a lot of central bankers remember 1998 … the more obvious em candidates are sing $ and KRW, but the Monetary authority of singapore (MAS) doesn’t want the inflows and I doubt the Bok does either.
the RUB by contrast clearly fits in the portfolio of an investment fund, and well, if SAFE is already being managed like an investment fund, all bets are off.
And we’ll see what this does for Chinese-Europe relations:
“…The counterattack against Danone continued late Friday, when Wahaha released letters from workers in various parts of the company… In one letter, which claimed to represent the entire sales force of Wahaha, the group called itself “the army of only Chairman Zong.”…”How can our respectable helmsman be forced away by Chinese traitors and rascal directors,” one passage said. “We only want Chairman Zong and we firmly reject Danone!”…” http://www.nytimes.com/2007/06/09/business/worldbusiness/09danone.html
re: “I would be surprised if a significant share of China’s reserves are in RUB”
me too for all the regions you mention. it would seem that Russian’s faith in their own currency may not yet be fully restored. But I guess, as you implied, that they are free to propose at any time - and as you also say, there may be alternatives to doing this. I was just looking for clarification of your recent remarks.
re: “China has a much bigger share of its portfolio in $ than euros” and “the net int. position is helped, but not Americans overall…” if there may be a bit of conflict between what’s best for entrepreneurs, governments and citizens…
and thank you for the response re: RUB
and probably obvious, but I meant “reasons” not “regions”
Brad,
Did you see the Business Week story about the understating of the costs of offshoring?
http://www.businessweek.com/magazine/content/07_25/b4039001.htm?campaign_id=nws_insdr_jun8&link_position=link1
Here is a piece from it:
“BusinessWeek’s analysis of the import price data reveals offshoring to low-cost countries is in fact creating “phantom GDP”–reported gains in GDP that don’t correspond to any actual domestic production. The only question is the magnitude of the disconnect. “There’s something real here, but we don’t know how much,” says J. Steven Landefeld, director of the Bureau of Economic Analysis (BEA), which puts together the GDP figures. Adds Matthew J. Slaughter, an economist at the Amos Tuck School of Business at Dartmouth College who until last February was on President George W. Bush’s Council of Economic Advisers: “There are potentially big implications. I worry about how pervasive this is.”
By BusinessWeek’s admittedly rough estimate, offshoring may have created about $66 billion in phantom GDP gains since 2003 (page 31). That would lower real GDP today by about half of 1%, which is substantial but not huge. But put another way, $66 billion would wipe out as much as 40% of the gains in manufacturing output over the same period.”
Hi Brad, if my memory is right, you grow up in Texas.
I want the best for you, because you are like open page and, by the way, you’d be a very great teacher, on top of a great economist!
I hope that Mr. Bush will get retired and won’t disturb anymore in Texas or anywhere else.
Long life!
PS: I miss the rants of D. Chiang. He’s on vacations?
I say if someone s surplus is bound to fall it’s the chinese ones. Who will they sell to if the western consumers have no cash left ?
I’ll comment on Mandel’s BWeek article in a bit.
China will sell to the resource exporting economies on current trends. they have lots o’ cash.
I grew up in Kansas, not Texas — and support the jawhawks, not the longhorns!
re: “longer-term horizons may already be treating the UK as a member of the EMU”
whether some may see it as part of Russia…
re: Mandel “…corporate leaders such as CEO John Chambers of Cisco Systems Inc. who have publicly worried about U.S. competitiveness… –and who perhaps coincidentally have been the ones leading the charge offshore”…” http://www.businessweek.com/magazine/content/07_25/b4039001.htm?campaign_id=nws_insdr_jun8&link_position=link1
wouldn’t Chambers see offshoring as a means to boosting competitiveness? (”…Cisco Systems focused the country’s attention on the need to reinvigorate programs for math, science and R&D to maintain America’s lead in technology competitiveness…” http://blogs.cisco.com/news/2006/04/post.html) by lowering (some) labour costs while presumably building high value added export markets. (how are IP assets developed ‘offshore’ by U.S. jv’s, satellites, whatever categorized? - and is the current ROI and output of American universities and ‘clusters’ reflected in the data?)
Mandel would argue (I think, and i think correctly) that offshoring may boost Cisco’s competitiveness and the profits of US capital (to the extent Cisco is owned by americans) but offshoring doesn’t boost the productivity of US labor or the US economy. Cisco’s competitiveness as a firm isn’t the same as US competitiveness …
IP assets developed offshore generate gains to the US investors in the jv (i.e. to capital) but they don’t really increase the productivity of the US economy. rents going to IP owners aren’t the same thing as productivity (tho i am venturing a bit outside my zone of knowledge here)
Well - they’re exporting labour too: “…Foreign companies are also importing their brightest and best to India. Cisco Systems, the US technology giant, transferred seven top managers to its Bangalore office this year…” http://www.guardian.co.uk/india/story/0,,2101541,00.html , , engaging in - ‘expatonomics? - which may be another kind of offshoring, the economic significance of which is rarely discussed.
The IP developers and owners are also, I believe, a huge part of Cisconomics and the American economy. Thought design and innovation was at the core of productivity…
Then there is capital structure…