Brad Setser

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How far will the US trade deficit fall next year?

by Brad Setser
October 20, 2008

US exports have been growing faster than non-oil imports for the last two years. The August trade data hints at a slowdown in exports. But at least on a y/y basis, the slowdown remains modest.

As a result of the (large) gap between the pace of US non-oil import growth and the pace of US export growth, the non-oil deficit has fallen substantially. Alas, the overall deficit has been more or less constant (in dollar terms), as the petroleum deficit has expanded significantly.

But oil is now on its way back down. What kind of improvement can the US expect?

Well, if oil falls to $70 and stays there, the petroleum deficit will fall substantially. Over the course of the year, the annual United States oil import bill could fall back to just under $300b — a roughly $100b improvement over the deficit of the last 12 months (and a much bigger improvement from the last three months, when imported oil averaged $120 a barrel).

And if the exports can continue to grow 9-10% faster than non-oil imports, the non-oil deficit will also continue to improve. 1% nominal (non-oil) import growth, 10% nominal export growth and $70 oil produces a 2009 deficit of around $400b — almost $300b better than now.

5% nominal export growth and a 5% fall in nominal imports would produce a similar result, but obviously implies a much worse trajectory for both the US and global economy.

The main risk to the forecast improvement is simple: US export growth ends up slowing more rapidly than US import growth, reducing the gap between the two growth rates. If US non-oil exports and non-oil imports both fell by 5%, the trade deficit would improve (the US imports more than it exports), but it wouldn’t improve by all that much.

Of course, all of these projections are just that — projections. They mechanically illustrate the impact of different assumptions about oil prices and non-oil import and export growth rates on the overall balance. They aren’t true forecasts.

And any forecast for the trade deficit (which tracks the current account balance for the US well right now, as the transfers deficit is offset for the time being by a surplus on the income balance) needs to be consistent with a broader macroeconomic view of the savings and investment balance.

Fortunately, don’t think that it is all that hard to tell a broader macroeconomic story that is consistent with a significant improvement in the trade balance next year.

On the oil side, the core assumption is that the fall in the oil price reduces the oil exporters savings rather than their domestic consumption and investment — so the fall in oil prices doesn’t feed through to a fall in their imports (read US exports).

On the US side, the assumption is that the windfall from lower oil prices is saved rather than spent on other goods and services. Indeed the overarching assumption of this forecast is that private consumption growth slows (and perhaps falls) and private investment falls in the US — and as a result American savers end up lending far more to the government than in the past. The shift in the private savings and investment balance in turn makes a dramatic rise in the fiscal deficit consistent with a fall in the current account deficit. Deutsche Bank — according to Menzie Chinn — is now forecasting both an 8% of GDP US fiscal deficit (well over $1 trillion) next year and a significant improvement in the current account deficit.

Broadly speaking, the deterioration of the fiscal balance is what avoids an even sharper fall in US activity, and an even sharper fall in US imports.

Thanks to Arpana Pandey of the CFR for help with the graphs.


  • Posted by b

    The Morgan Stanley GEF team expect the $ to be up to 1.25 Euro next year. Together with the recent rise of the $ that suggests that the advance in exports over imports over the last two years will slow down and may well revert.

  • Posted by TJ

    The global comparative advantage of the US Economy in financial services has been demonstrated to be fictitious, based more or less on Enron-style creative accounting of balance sheets. 🙂 LOL.

    China tops US in high-tech exports

    [BEIJING] A study of technological competitiveness suggests that China’s rapid development in high-tech product exports is challenging the United States’ leadership in global technological innovation.

    Published last week (24 January) by researchers at the US-based Georgia Institute of Technology, the 2007 ‘High Tech Indicators –– Technology-based Competitiveness of 33 Nations’ report traces the technological performance of 33 countries in the past 15 years.

    The report analysed four ‘input’ indicators: national orientation (evidence that a country is actively trying to achieve technological competitiveness), socioeconomic infrastructure, technological infrastructure and productive capacity (a measure of the resources devoted to manufacturing products and how efficiently these are used).

    The opinions of 392 experts from within the 33 countries were also used.

    In addition to these, the researchers gave each country an ‘output’ indicator of technological ranking based on its recent success in exporting high technology products, primarily evaluated by comparing the monetary value of electronics exports.

    China obtained a figure of 82.8, replacing the United States — who achieved a figure of 76.1 — at the top of the technological league table.

  • Posted by bsetser

    Jen has long been a dollar bull (re GEF). I can see the argument, but a euro/ $ at 1.25 leaves the US with a large external deficit that needs financing and Europe with rough balance — so it has be combined with a story that explains how the ongoing US deficit is financed. I think Jen’s answer is China … which basically keeps BW2 going.

    Certainly tho the dollar’s recent appreciation will be — with a lag — a drag on US export growth if it is sustained.

  • Posted by mft

    Excuse me, what happens when all those “surplus savings” dollars available for asset investment as a result of Breton Woods II are no longer there? A horrible gurgling sound?

  • Posted by fatbrick

    One fact about export: just as American are more conservertive about consumption and the imports decline, the rest of world will do the same. Barring the exchange rate change, the demand for American goods will fall, maybe faster since American’s exports tend to be high end goods and with higher elasticity.

  • Posted by unokai

    hmmm.. i think the rising dollar will evaporate the export growth. cheap oil/strong dollar/shrinking oil deficit/falling export equates expensive oil/weak dollar/rising oil deficit/rising export, isn’t it?

  • Posted by TJ

    People on Main Street in this country are now so desperate for a way out of this financial mess that they will believe anything, even the emptiest political rhetoric that promises nothing more than a free lunch. Unfortunately, there is no free lunch. That is exactly the kind of thinking that got us into this mess in the first place. The way out of this mess involves sacrifice and character, which needs to start at the top. Executives, investment managers, regulators, and politicians need to demonstrate competence and take responsibility for failure. Why do Hank and Ben and Chris (Cox) still have their jobs? Why aren’t people burning an effigy of Alan Greenspan in the street? Why is everyone still ignoring Congressman Ron Paul, one of the very few politicians who predicted this disaster many years ago and tried, without success, to stop it from happening? Why aren’t people listening to responsible career regulators like Sheila Bair at the FDIC and David Walker, former head of the Government Accounting Office? This country needs more hedge hogs (workers) and fewer peacocks (show offs). We need to start saving again. We need to stop borrowing so much money. We need to start creating more goods and services that people at home and all over the world want to buy. That is what makes a great country. This is not rocket science, but it is also not easy. It is not fun. It will be a painful and slow process of reorienting the economy away from borrowing, spending and speculating and towards saving and producing, but if we don’t start changing our profligate ways our problems will continue to get worse.

  • Posted by baychev

    most commenters seem to see only the left side of the equation. just look to europe/asia/the middle east, south america. aren’t they net exporters? and to whom mainly? the usa.
    so if the u.s. imports less, the net exporters will import even less between each other and the u.s. as they are anyways net exporters(meaning they import less than export). expressed mathematically: 5>3,3>2 therefore 5>2.
    so expact shrinking global trade and little chage in the status quo.

  • Posted by Cedric Regula

    John Mauldin’s weekend newsletter pointed out that S&P analysts have been steadily lowering 2009 earnings forecasts for the S&P 500 from $80 to $48. The Macro Man blog gives similar estimates the last couple days.

    Doesn’t look too rosey for either import or export growth.

    In theory, fiscal spending is supposed to prop things up, but we are doing it a brand new way now. We are buying past losses. I’m still trying to work out how buying past losses helps the economy. It may, but in strange ways.

    Then there is the emergency OPEC meeting coming up. But now it sounds like maybe only the hawks want $100 oil, and the doves would settle for $80.

    Then there is talk about more fiscal stimulus in Congress, since they may have their doubts that buying losses will do the trick next year. So that trillion may get larger yet.

    So lots of moving gears in the equation.

  • Posted by JKH

    I’m a bit confused by this $ 1 trillion fiscal deficit call.

    I assume it includes $ 0 with respect to the $ 750 Tarp investment authority?

  • Posted by bsetser

    JKH — that is right, the TARP isn’t part of the estimate. The estimate likely assumes falls in corp. tax revenue (already down), less income tax rev, less cap gains tax revenue, etc — plus a new stimulus package.

  • Posted by Cedric Regula

    Running total so far. Of course these are “investments” and not deficit spending. But they need treasury financing anyway.

    The new stimulus budget being kicked around sounds like its in the $150-$300B range from the news today. That’s not in the 2.37T yet. Some of this may have come out of this fiscal year spending. Then I keep thinking that the Fed may need re-capping…but they are looking great so maybe not next year,yet.

    1.8T Bailouts
    + 480B Projected fed deficit next year per latest CBO estimate
    +90B Iraq off budget cost
    = $2.37 Trillion

    —Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
    —Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
    —The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
    —At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
    —Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie’s at $798.2 billion.
    —$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
    —At least $87 billion in repayments to JPMorgan Chase for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers. Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
    —$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
    —$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
    —$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
    —$29 billion in financing for JPMorgan Chase’s government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
    —At least $200 billion of currently outstanding loans to banks issued through the Fed’s Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.
    -so, so, so is this the correct total?

  • Posted by black swan

    Brad, at 6:46 this morning, I posted an opinion that Switzerland, being forced to enter into euro swaps, could turn out to be the next Iceland. It may have tured out to be a prophetic call, but you didn’t see fit to run it. Anyway, I just found this article in the Independent begging the same question.

  • Posted by JKH


    You’re probably quite aware of this, but John Mauldin just published your swap line post in his weekly missive. His mailing list is about 2 million, so you may get some additional comments.

  • Posted by bsetser

    JKH– i didn’t read mauldin today, so it is news to me — i would have thought he would ask tho before using my material …

    black swan — i’ll see if i can find it. the interface for comments has changed — and i didn’t notice anything that had been blocked, but i also am not sure i would know where to look now (there have been some backend changes on the cfr blog platform). in general comments with lots of links get blocked.

  • Posted by JKH


    I wondered about that, which is why I drew attention to it. The attribution reference on the letter is OK, I guess, but one might be mildly annoyed without a courtesy heads up.

    If I can find it reproduced on his website I’ll post the link.

  • Posted by JKH

    Here’s the intro paste anyway:

    The G-7 countries now have what amounts to access to the US Fed’s window for dollars for their banks. But what of the rest of the world? Brad Setser, an analyst who writes a blog for the Council on Foreign Relations, ask some very interesting questions and points out some big holes in the world economic landscape. If you can’t get dollars what does that do to your currency? This contributes to the rise in the dollar against some emerging market currencies. Setser asks: “Where is my swap line? And will the diffusion of financial power Balkanize the global response to a broadening crisis?”

    You can read some of his other material at Setser is an applied international economist with experience at the U.S. Treasury and the International Monetary Fund. Currently examining central bank reserve growth, sovereign wealth funds, and the political implications of emerging market financing of the United States. Author of the recent Council Special Report, Sovereign Wealth and Sovereign Power.

    John Mauldin, Editor
    Outside the Box

  • Posted by black swan

    In the first year of the Depression, the US was the greatest creditor nation and the driving engine for world trade. The 1930 USD was extremely strong. European trading partners were not only weakened by their negative account balances with the US, but also by the war debts owed to this country. The US was depleting the supplies of gold and hard currencies that were held in European banks.

    To combat this, the Europeans lowered the prices of their exports to America. America, in turn, passed the Smoot-Hartley Act. The Europeans then passed their own protective tariffs, and the depression solidified.

    The positon the US finds itself in today is a far cry from the economic position it was in during the early 1930s. At present, the US is the greatest debtor nation, but this time around, all central banks are cooperating with eachother. Oddly enough, with the USD suddenly strengthening against most other non-pegged currencies, history may repeat, and the world could, once again, end up with a constipated international trade problem. Although America is weak, America’s export recipients seem to be growing even weaker.

  • Posted by glory

    fwiw, i’ve found that while cfr’s platform doesn’t like lots of links in comments, it doesn’t mind so much if they’re href’d, e.g. 😛


  • Posted by bsetser

    glory — i have to manually approve a high fraction of your comments, so you are getting by my screen more than anything else!

    JKH — I don’t really mind the attention from Mauldin, but given that he reproduced the entire post (errors and all) I guess I would have expected that he would ask as a courtesy. Maybe he asked the Council press office … .

  • Posted by Chidambaram

    Apart from SWFs last week, some large US mutual funds have also started going long this week.
    The markets should be much higher than their current levels by Christmas.
    Once the markets are up again, nobody will listen to or read about deficits, the fed’s balance sheet, etc.

  • Posted by jboss


    You’re either assuming stable to growing GDP, if considering trade deficit in percent terms, or the value of money to be stable to growing, if talking about nominal deficit.

    I’m looking for several quarters of falling GDP. Either beginning last year (realistically) or morphed in time by the weird deflator in official statistics. That magical deflator will swing back quite soon.

    And if you’re talking about nominal trade deficit, all you might have found is the beginning of deflation.
    Dollar going up, credit going down, talk about the thirties…
    Under the hood this is deflation. The treasury might succeed in reinflating soon enough to avoid negative CPI and second-round effects, after all wages are sticky and deflationary shocks really need time to work through the system. But in any realistic measure the US is deflating in the moment.
    So the big question is: What about trade deficit in real terms or compared to GDP?

    Markets might go up for now, but come earnings season, there might be another bloodbath.

  • Posted by jboss

    Sorry, value of money stable to falling, of course…

  • Posted by Cedric Regula

    Losses are exports! Now we know.

    Euro and British Pound Drop As Lehman CDS Deadline Increases Dollar Demand.

    The Euro and the Pound fell to their lowest levels in over a week as the appetite for dollars was fueled by today’s deadline for settlement of Lehman Brothers CDS’s. Rumors are that banks and other sellers are hoarding cash to payout a estimated 91% loss on the investments. Meanwhile, France’s government announced the investment of 10.5 billion euros in the country’s largest banks including BNP Baribus SA, Societe Generale SA, and Agricole SA.

    The Euro would fall to as low as 1.3210 before finding support as demand for dollars and the outlook for further easing from the ECB increased. Indeed, comments today from central bank members Juergen Stark and Jose Manuel Gonzalez-Paramo where they called for inflation to ease faster than expected as growth slows. The dovish comments from the policy makers are a significant break from the staunch hawkish stance and focus on price stability. The comments may signal that further easing from the ECB could be forthcoming as the MPC tends to signal their next move. Expectations for a rate cut are at their highest levels according to Credit Suisse overnight index swaps which are pricing in 138 bps of rate cuts.

    The Pound continued its losses from yesterday as it fell another 20 bps to 1.7000. The GBPUSD found support at the psychological support level but could fall further with the 10/10 low of 1.6779 as a possible target. Tomorrow’s BoE minutes may be the catalyst for another move lower as we get insight s into the central bank’s concerns and the possibility if future easing. We expect that the vote was unanimous which would signal that the MPC has finally abandoned their concern regarding inflation and that efforts to promote growth will now dictate future policy decisions.

    A barren U.S. calendar will leave the dollar’s fate to the appetite for U.S. assets. The greenback’s recent rise has been in part due to a flight to safety due to the credit crisis and France’s cash infusion in to their major banks may be perpetuating these fears. However, before the peaking of the credit crisis the dollar was receiving support as the U.S. economy was viewed as the best positioned to emerge from the current downtrend. We may be seeing that paradigm coming back into play as the U.S. continues to be proactive in promoting growth as demonstrated by Chairman Ben Bernanke support of a second fiscal stimulus. Despite the declining fundamentals in the U.S. and expectations of another rate cut, Europe is still viewed as behind the curve regarding the current downturn which will keep the dollar supportive over the medium-term.

  • Posted by ttnk

    Don’t forget the suddenly-appearing fairies !

    Their fiscal assault just re-leveraged into the newly discovered anti-dwarf support areas, to be reinforced with soon to follow tax-free, inverse to G-hole, funds repatriation. The doves might settle for an 80, for a while. Plus the fairies added two brand new acquisitions, the first being a new poster-character for re-branding the green assets value. If they net-out and/or disappear the previously erected mythical D-hole, from which they all suddenly appeared, to roughly 15%, the combined total of the transatlantic fiscal shake-ups with their market re-appearance just gained in probability of filling-in the empty glass in which all inhabitants dwell; to a safe-enough level. By swapping (underlying are the roughly-correct geographical relations) and hedging the tails, the blue to green relation, again roughly, will – for this operation’s duration – stay in check thus merging the both sides of the D-hole equation monetarily and hedging it (nominally) against the rest, while the rest get to watch a sex-scandal at the IMF. Side-effectively a hedge for the 80 outcome suddenly appears as the doves stop scratching their heads, for a while. Later-on, there is the well known fairies ability to, mythically, restart the cycle by either injecting the fuel into the re-branded assets or at least, this time around, into the next carry-on, reflection-protected, vehicle to pump up what’s left. A few of this fairy tale inhabitants actually think that J.K. Rowling’s characters were implanted higher IQs than all of these mythical fairies combined one. The thing is they have to be wrong.

  • Posted by Cedric Regula

    That’s exactly how I see it.

  • Posted by Cedric Regula

    Also evidence Bernanke sees fairies too.

    “Bernanke: Economic weakness in next few quarters and risk of a protracted recession call for a well-timed, well-targeted, cost-effective fiscal stimulus w/o raising the structural fiscal deficit; given tight credit conditions the stimulus must improve credit access to consumers, home buyers, firms”

    Parsing thru this sentence would be problematic for the less lucid among us, not to mention raising some philosophical questions about what really needs fixing.

    But in the always and ever present short term, this sentence fragment appears to be the challenge:

    “…cost-effective fiscal stimulus w/o raising the structural fiscal deficit..”

    He left it to Congress to come up with the detailed implementation of this objective, but I can clearly see one way that’ll work.

    Congress should pass some legislation requiring banks to change the billing address of all credit card statements to:

    To Whom It May Concern
    1600 Pennsylvania Ave.
    Washington DC, USA

    The bills will then be forwarded to European banks for payment. Ben knows how to handle it from there.

  • Posted by LB

    after spending some time in iceland and then reading about what happened there, my first thought was that the faeries were running the show…tricksters that they are…
    never discount the elves in the machine!

  • Posted by black swan

    It looks like Argentina just became gnome-man’s land.