Brad Setser

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Cross border flows, with a bit of macroeconomics

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The fall in the US trade deficit in November

by Brad Setser
January 13, 2009

I’ll be unusually brief. I have been working through the latest data on China — and, well, it is hard to top Calculated Risk.

The fall in the US trade deficit today was easy to anticipate. The average price of imported oil was sure to fall from $92 in October. It came down to $67 a barrel in November. The petrol deficit fell by about $13 billion.

That wasn’t all though. The non-petrol goods deficit also fell by about $4 billion. Y/y non-petrol goods imports were down 9.3% (they were down about 1% in October); y/y non petrol goods exports were down 4.4% in November. They were up 2.4% in November. So long as non-petrol imports fall faster than non-petrol exports, the US deficit will shrink.

This shows up in clearly in a plot — prepared by Arpana Pandey — of real goods imports and exports. In November the down turn in imports was sharper than the downturn in exports.

There isn’t anything good in this graph other than the fall in the trade deficit. Falls in exports and imports signal contracting global activity. And I am not even sure that the improvement in the trade balance will continue, as I suspect the combination of a stronger dollar and a broadening global slowdown will eventually have a major impact on exports — and the US fiscal stimulus will bleed into imports. But the US led the world down and for now, US imports are falling faster than US exports …


  • Posted by analyst

    U.S. trade imports will decline much much further. the problem is the U.S. will be competing to export goods vs. other players and a stronger dollar hurts our international (U.S. based) corporations.
    Weak dollar kills europe, and strong dollar puts a major dent U.S. exports. Who wins? We see what a strong Yen has done to Japan. That economy can’t export anything under current conditions.

    I’d look for trade flows (export graphs) of China and other exporters in coming months so we can get a scope of how the global economy is looking(i fear much further downside).

    As of now, the baltic sea index is frozen and exports globally are falling off a cliff. The market has not factored in the free fall in exporters=translate in decline of consumer consumption at very dramatic levels. Consumer sentiment numbers will certainly surprise the market to the downside.

    I can’t figure of an industry doing well in this sort of deflationary environment.

    Maybe the airlines? $30 oil, if people still fly…

  • Posted by don

    My guess – Europe is paying more than apace for the U.S. trade balance improvement. They will prove unable to bear the weight.

  • Posted by analyst

    i agree. for all the dollar bears out there i would like to know how europe would survive a dollar collapse?

    the continent would be unable to export anything. So if the dollar collapses so does the rest of the world. Correct?

    in that case i guess it’s fair to argue that the United States can run up infinite deficits. To some extent when Cheney said “Deficits don’t matter”, maybe he is correct!

  • Posted by Isaac

    The decline in trade volume is not that surprising. Trade volume normally declines in recessions. During the last recession, trade volume fell (on a y/y basis) by as much as 15% (in September 2001). This decline in trade volume is 6.9%. Though we should expect trade volume to continue to decline I’m not sure this says much about the global economy and much more about the nature of a US recession.

  • Posted by sfone

    W/ oil averaging <$40/bbl for Dec, you should expect to see AT LEAST a $12bn further improvement from the energy component alone. You should also expect significant contractions in imports, (Japan auto imports are excellent ilustration- we’re seeing 10mm SAAR, inventory piling up at the ports and Mike Jackson from AN telling you he’s got 1q orders down 50%) and Japans trade balance (60% of which is auto related) to continue to shrink massively. Extrapolating some early retail sales data, SF closings, and claims on general inventory reductions from China’s balance also should provide a few $bn in trade improvement. In sum, I would expect an 09 deficit on the order of $250-$300bn, a $400bn or so improvement vs ’08 and quite close to the current 4% annualized savings rate for the US household

  • Posted by Rien Huizer

    Looks like we are slightly overshooting the cyclical correction following some 10-odd years of Chinese carbohydrates growth. As long as the fall in imports reflects less domestic demand for useless consumer goods and luxuries, fine with me, it can only lead to a US economy that can stand on its own feet. Not that I advocate autarchy or mercantilism of course (mercantilism only in exceptional circumstances: for poor countries as a way to climb the first steps of the development ladder and for rich countries if they have to behave strategically in an environment where “free trade” is no longer widely supported internationally). But the US must try to avoid complete addiction to the benefits of reserve currency status, and in the absence of an effective equilibrating mechanism for labor costs (while technology and capital have never been more mobile), no high-cost democratic country can afford policies that turn the reserve currency advantage into unsustainable hedonism. Sooner or later the economy will contract sharply (leading to an isolationist and possibly fascist backlash, Argentinian style) or the reserve status will erode over time and “Argentinian-style” becomes a eufemism.

    So, a bit of an overshoot perhaps, but possibly a healthy one. My concern is that we are in the process of creating (to avoid normal recessionary and deflationary cyclical effects apparently) a structurally inflationary process of
    public spending everywhere in the OECD, and that in the presence of labor markets with very little domestic excess labor capacity (the unemployment figures in the EU reflect mainly structural unemployment). If the OECD countries, as a whole of with a few “clubs” would resort to tighter import policies for manufactures etc, we could well switch very quickly (2010/11) move to stagflation, if labor could resurrect the various union movements.

  • Posted by Howard Richman


    It is not clear yet whether November was a blip downward in a rising trade deficit or the beginning of a new trend toward smalller US trade deficits.

    There are at least four factors operating right now which affect the US trade deficit. Two of them tend to increase the US trade deficit; the other two tend to decrease the deficit:

    1. The stronger dollar tends to increase the trade deficit.

    2. The United States is a major capital goods (i.e., investment goods) exporter, and investment goods tend to be the hardest hit during a depression. This will tend to increase the trade deficit.

    3. A worldwide depression tends to decrease trade overall, reducing both imports and exports. This will tend to decrease the trade deficit.

    4. The falling oil prices reduce the cost of America’s energy imports. This will tend to decrease the trade deficit.

    With so many factors operating, the direction of the trade deficit (as a percentage of US GDP) is indeterminate. My guess is that the US trade deficit will grow during the depression. The November statistics may have blipped downward due to the build-up of consumer goods inventories. Once consumer goods inventories stabilize, I’m predicting that the stronger dollar and rapidly falling capital-goods exports will cause the US trade deficit to increase.

    Howard Richman

  • Posted by ReformerRay

    One note ReformerRay reiterates _ “We should be forcing a decline in the U.S. trade deficit by changes in U.S. law rather than waiting to see what is given us”