The 2007 US trade data
The US December trade deficit was a bit smaller than expected — thanks to a jump in exports (paced by a $1.35b increase in aircraft exports) and a big ($3.9b) fall in non-oil goods imports. The fall in non-petroleum imports offset a $1.45b rise in the bill for imported oil. The bounce in exports is obviously goods news; the fall in non-petroleum imports — a fall that brought non-petroleum imports back to their end-December 2006 level — is obviously bad news. It likely reflects a slowing economy, not a shift from imports to US products.
A graph of the y/y change in non-oil goods and services exports and imports shows that the improvement in the trade balance stems largely from the recent slide in the pace of import growth, not an acceleration in export growth.
Indeed, abstracting from month to month volatility due to the timing of one-way delivery flights from Seattle area airports, export growth doesn’t look all that strong — at least in real terms. Q4 real non-petroleum goods exports (exhibit 11) look to be roughly at the same level as in Q3. December strength made up for November weakness. Nominal growth is increasingly coming from higher export prices. Kansas is getting more on every bushel of wheat it sells to the world.
But rather than focus too much on the monthly data, I wanted to focus on the annual data. Both exports and imports trended up in 2007. And if you just look at the rolling 12m totals, it is hard to detect any change in export growth — and even the dip in (non-oil) import growth takes a bit of work to see.
The key trends show up more readily in a graph of the actual deficit, broken into the petroleum and non-petroleum deficit.
Constant export growth and slowing non-oil import growth have brought done the non-oil deficit. But he improvement in the deficit seems to be slowing.
Look at the next graph — which shows the (at the bottom) the y/y change in the deficit (comparing rolling 12m sums). The pace of improvement has indeed slowed.
Blame the rise in the price of oil for absence of more improvement.
That is likely to be a big theme in 2008 as well. The average price of imported oil in December was $82.76 a barrel. The average for all of 2007 was only $64.27 a barrel. If the December price is sustained for the full year, the US imported petroleum bill would rise by almost $100b in 2008. That most likely would overwhelm the improvement in the non-oil trade balance.
The 2007 trade deficit (goods and services) came in at around $712b (5.15% of US GDP) — down from $759b in 2006 despite an almost $30b increase in the United States oil import bill. The 2007 trade deficit is about the same size as the 2005 deficit in nominal terms, and thus certainly smaller in real terms.
If the income and transfers balance for q4 match their average for the first three quarters, the 2007 current account deficit should be around $760b, or 5.5% of US GDP. If the improvement in the income balance in the q3 data is sustained, the current account deficit might be in the $740-750b range.
If oil falls, the current account balance might improve more in nominal terms in 2008. If oil stays high though, I suspect the nominal deficit won’t improve by much — even if a recession keeps non-oil import growth down. Right now, it looks like the 2008 US petroleum import bill will top $400b fairly easily.
I don’t want to dwell on the the bilateral deficits with different regions today.
Suffice to say that the bilateral balance with Latin America, India, Canada, Latin America and Asia-ex-China improved, while the bilateral balance with China, Mexico (oil) and OPEC all got worse. With imports from China growing faster than non-oil imports (11.7% v 4.6% for all of 2007 v all of 2006), I think there is growing evidence that China is taking market share away from countries that have allowed their currencies to appreciate by more than China has. But that is a topic for another day.
And in any case, right now, the rise in oil prices — not the rise in imports from China — is the dominant factor keeping the deficit up.
Finally, thanks to Arpana Pandey of the Council of Foreign Relations for helping to pull together the data in the graphs.
Thanks for an extremely informative post!
Very heavy food for thought, what with the present situation in the Mid East, and the oil price trend. It seems to be possible that the extra war spending money Bush asked for will be overshadowed by the 2008 petrol bill. The thing is, a US pullout would by no means guarantee yesteryears oil prices.
I don’t agree with saying: “is obviously bad news.” First it is hardly significant. Second, perhaps it is an indication of bad news that the economy and consumer spending is weak. Given how far in debt, consumers (and the government is) reducing the imports hardly seems like bad news to me - it seems we would be better off if imports were reduced and the savings rate increased in the USA.
Brad,
Interesting post. How does this compare with your predictions from earlier in the year? And do you have any predictions for 2008 given the current recession probabilities in the US?
Well then the future is “bright”. Exporting recession from the US to China will lower the price of oil. Hence the oil bill. Barring of course any further stupid move in the middle east.
On top of this a possible aggravated credit crunch will mean foreigners will find it more and more difficult to find US agents willing to borrow. Phrased otherwise, lowering rates in the USA will make it prohibitive for foreign countries to keep their peg.
Hence if you care only about the rebalancing, be happy it is happening.
Aren’t nominal terms more important than real terms for adjustment?
“…a third of the world’s population lives in countries with food price controls or export bans… this is just part of a much bigger problem of capital and resource misallocation… if the world today was a rational economic place, then regions… which are food-constrained ought to be investing heavily in agriculture. And since the US is the world’s biggest agricultural supplier, this implies that the Saudi Arabians, say, should be snapping up farms in Wisconsin…” http://www.ft.com/cms/s/0/76e353b2-db68-11dc-9fdd-0000779fd2ac.html
America’s Truth Deficit
As William Greider writes, “Since there is very little real wealth generating industrial capacity left, only a recession is guaranteed to reduce the enormous US trade deficit”.
A deep recession is what we are going to get. Bernanke is flat wrong, lowering interest rates to ZIRP to provide liquidity may bailout some politically-connected leveraged Hedge Funds, but it won’t solve the fundamental economic issues in the US Economy of middle class solvency.
China Blasts U.S. Over Spy Charges
China called recent U.S. allegations of espionage a “farce” and defended itself against criticism from Steven Spielberg, who withdrew as an adviser to the Beijing Olympics over the issue of Darfur.
A deepening chill in US-China ties
To avoid possibility of a new cold war, Washington must curb protectionist instincts and Beijing must rethink support for tyrants who control reserves of oil or timber.
I’m not sure who is buying US debt below the inflation rate, but if a lot of it is central banks and protectionism is rising, yields are probably heading higher, steepening the yield curve in the process (as the Fed cuts).
A lot of it is central banks — see the Dec TIC data and the Fed’s custodial holdings for January.
the 07 current account deficit is roughly in line with my expectations — at least my post august expectations. for the past several months I have been using $750b as my baseline estimate.
It is smaller than I thought at the beginning of 07, though, for two reasons:
1) I was worried (based on the mini slump in exports at the end of 06) that the uS wouldn’t be able to sustain its current pace of export growth
and
2) more importantly, I thought the income balance would deteriorate and instead it improved. a lot of that has to do with some big data revisions, but not all — i got that wrong. that tho is a subject of another post.
for 08 — tis a race between
slow (perhaps falling) non-oil imports
a likely slowdown in exports — real exports have slowed already, but higher prices are keeping the nominal growth rate up as the global economy slows. the offsetting factor is a (weaker) dollar, but on balance, i would at this stage put more emphasis on the global slowdown. the delays in the 787 program also won’t help.
and the rising oil import bill. if you take the monthly bill for december and multiply it by 12, you would get a $100b increase in the oil import bill.
Dave Chang may be right, that the US slowdown won’t impact China all that much. China seems to just be steaming ahead, irrespective of US problems:
http://www.bloomberg.com/apps/news?pid=20601068&sid=a_KhbnCjcLiE&refer=economy
Yes, overall we have a trade deficit. But what do all the individual balances tell us, especially about the future?
And to add to what DC said, the USA spends more on military spending than all other countries combined. It spends more per capital than almost all other countries on health care, energy, inane junk, etc., with less and less to export. How is the adjustment going to happen?
Stephen H
I think twofish would point out that the rest of the world (consciously or unconsciously) wants the US to spend more militarily than everyone else combined, because global hegemony (rather than a multipolar struggle for dominance) is good for business.
How will the adjustment happen?
uh, the credit line will run out.
that has happened to a degree for households.
it has yet to happen for the federal government.
without access to credit the US would have to cut back even more.
now if folks stop being willing to borrow at current rates but the global savers don’t adjust, then something else would need to happen — us rates woudl have to fall to where US households and firms wanted to borrow, or the low return on us assets would need to induce the rest of the world to save less (or put more of their savings to work elsewhere)
A severe drop in living standards in US is, in theory, very likely. Any drop in energy or “defense” spending would seem a lot less likely, at least not in 2008.
In FT they’re talking about SWFs focusing more on private equity funds. These being more open to actual control, it stands to reason that these are more attractive than the big name banks, where direct influence is near taboo.
Flush private equity funds might help ease some of the credit crunch somehow, not necessarily in a very transparent way, though.
brad - why is the world bank still providing assistance to china if its success only exacerbates the imbalances?
the amount of WB assistance is small in the grand scheme of things, but directionally, it does add to the imbalances. it goes to a bigger question about the role of the bank — is it only to lend to poor countries that otherwise lack financing (in which case its role would be dramatically reduced), or should it operate in countries where there are poor people and good projects where its expertise arguably could help.
the mcgregor piece on chilalco and the sender piece on Singapore (and — big news — SAFE — in TPG’s financial sector fund) are both interesting.
I am a bit skeptical on PE really easing the credit crunch. the problem now is a lack of demand for securitized loans. and that isn’t PE’s business. if they want to recap the monolines business insuring subprime CDOs, that would help — but my guess is that they don’t want to go there.
In general terms does the following adjustment process make sense? Since most of the insolvent / potentially insolvent debts around here are denominated in USD:
1. Fed inflates like mad
2. Then or at the same time, the government buys out selected bad debts. This is cheaper because the currency has just been or will be inflated.
Does it materially help the US government with a given nominal deficit and debt, if that deficit and debt have a lower real value? Or is that only helpful in a several-times-removed sense because the government cannot manufacture goods and sell them abroad for foreign (i.e. “hard”) currency?
I usually do not post an off-topic article, but this one is really irresistable.
From FT.COM, “Bangladesh bank offers loans to US poor”, http://www.ft.com/cms/s/0/a612164c-dbf8-11dc-bc82-0000779fd2ac.html
“…Out of the gate, the Peterson foundation will be worth about $100 million and Mr. Peterson expects it to grow to $1 billion, a large part of his total fortune…” http://www.nytimes.com/2008/02/15/business/15pete.html?dlbk
what’s nyc’s NRB population?
“Bangladesh received close to US$ 6 billion remittances in the just concluded fiscal year, thanks to increased manpower export. Non-resident Bangladeshis (NRBs) in 2006-07 sent $5984 million compared to $4802 million in 2005-06, recording a 24.61% growth. With the rise in remittances, the country’s foreign exchange reserves yesterday hit an all time high at $5.09 billion…” http://www.banglacommunity.com/showthread.php?t=6110
“…Bangladesh received more than US $32 billion remittances from its migrant population between 1976 and February 2005…” http://www.populationasia.org/Publications/RP/AMCRP20.pdf
I have a great deal of respect for Pete Peterson, and have benefited immensely from his generousity, both to the Peterson institute and the Council. I would have even more respect for Pete Peterson if he took a strong public stance against the carried interest tax break.
I never understood why it made sense for me to be taxed at a higher rate — as an independent contractor — than folks who i worked for …
“WB assistance” - why not leave it to china’s millionaires and billionaires? shouldn’t china inc. take full responsibility for those impoverished by its’ own elites?
(”independent” with an office in CFR’s NYC headquarters and a management position with RGE?)
When I consult for private financial firms, I am an independent contractor.
and for that matter, i was taxed at a higher rate than the top dogs of the private equity business at a start-up (RGE) and at a non-profit (the CFR).
my point was simply that Pete Peterson would go up in my estimation — and I would take his message more seriously — if he was taxed at the same rate as everyone else who doesn’t benefit from the carried interest tax break. It is hard for me to see that case for cutting back soc. sec (particularly since it is in pretty good financial shape) when PE income (and yes, fee income for managing other people’s money is income) is taxed at 15%.
sorry, but difficult to understand how you can be independent while operating under the umbrella of the rge/cfr/iie brands - or why you would deny or argue this when a great deal of your writing is dedicated to advertising your affiliations with these entities, and particularly when you maintain a management position with one while insisting you are an outside contributor.
if the tax issue may be better addressed by revisiting the whole notion of wealth creators as opposed to labour/welfare. as you use yourself as an example, it’s my understanding that you depend on rge/cfr/iie to create demand for, and cover the cost of your work, which presumably includes a requirement/desire to reside in the heart of one of the world’s most expensive cities. what if the lesser taxed individuals you depend on for contracts and income informed you that any increase in their taxes will have to be covered by an equivalent reduction in your salary?
and your views have not convinced me that you think your tax dollars are put to good use…
If various financial firms knocked my salary to offset the impact of taxing carried interest as ordinary income, so be it — I put a high value on fairness, and the fact that the income of some very-wealthy individuals is taxed at a lower rate than the income of the less-well-to-do eats at me.
and I assure you that I do not have a management position at RGE (the website hopefully has been updated) — send an email to editor@rgemonitor.com and ask. I no longer supervise the site.
the accuracy of rge’s website is your concern, not mine! - except you seem to be indicating i am right to question everything i read on it (as i question everything)
why not abolish taxes altogether? haven’t governments been beavering away on the implementation of more efficient and innovative ways to support spending? isn’t the problem that governments spend too much on the wrong things? if the wealth creators say ‘to hell with higher tax’ and leave, then what? if only wealth destroyers should pay - whether through taxes, fines, fees etc..
as a profit maximizing economist residing in a wealthy, expensive tax haven, we might suspect your choice to operate as an ‘independent contractor’ may have something to do with minimizing your tax rate and that your career path will influence your policy preferences going forward as you (re)structure your career and choice of income streams.
Not sure this is worth continuing, but i can assure you that I haven’t done anything to minimize my tax rate — indeed, i live in a city with high taxes and i haven’t made any effort to turn income into capital gains to lower my taxes. No tax haven effects.
I don’t accept your characterization of government as bad and as a drain on “wealth” creators though. government provides services we all need and use and should all pay for. and i believe the tax system should be progressive. if you don’t, fair enough.
agreed - particularly as you keep mischaracterizing - dare i say fabricating? - ‘my’ comments!
i said none of the things you are ‘accusing’ me of saying. i was asking you to think through your version of ‘progressive taxation’, but can only assume you haven’t and are obviously annoyed that anyone might ask you to do that.
Brad,
You say: “The alternative to a weak dollar is a US monetary policy aimed at supporting the dollar rather than stabilizing economic activity in the United States ….” What about, for example, increasing taxes on energy (to reduce the trade deficit) and keep the money in the USA (to support the economy) by spending on mass transportation and energy savings in the USA. There are other unproductive, polluting excesses that will have to be reduced. Would that be a middle ground right now- help both the dollar and the US economy?
Stephen H