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LinkedInThe US January trade deficit fell to $36 billion. That is as low as it has been in a long time. The petroleum deficit (seasonally adjusted) fell to $14.7 billion — $4 billion less than in December 2008 and $20 billion less than January 2008.
So where is the bad news?
1) The average price of imported oil in January was $39.81. Why is that bad news? Simple: Unless the price of oil tumbles, the monthly US petrol deficit isn’t going to fall further. From June to August the monthly petrol deficit was, on average, close to $39 billion. The fall in the price of oil since then consequently has brought the overall deficit down by close to $25 billion. That alone explains most of the improvement in the trade deficit.
2) More importantly, the pace of decline in US non-petrol goods exports now exceeds the pace of decline in non-petrol goods imports. Non-petrol goods exports were down 21.5% y/y in January; non-petrol goods imports were down 18% (Exhibit 9). Relative to August, exports are down more than 28% and imports are down more than 23%.
The data on the United States ‘real” trade balance consequently paints a far more discouraging picture. The real balance removes the impact of price changes from the data. The real non-petrol goods deficit was a bit wider in January than in December ($32.8b chain weighted dollars v $31.6b). The deceleration in real export growth has been quite sharp. Real exports were up 10% y/y as recently as July 2008. They were down 9.7% y/y in December 2008. And they were down 19.2% in January.
Real goods imports flat in June 2008 (and close to flat in July); they are now down over 17.6% y/y in real terms. Not only is the y/y fall in exports now larger than the year over year fall in imports, but the pace of deterioration in exports is now more rapid.*
Net exports subtracted from US growth in q4 for the first time in a long time. That may well continue in q1.
The sharp fall in US exports — and the end of the improvement in the US “real” trade balance — adds urgency to the US call for a larger global stimulus.
China’s Premier Wen has expressed concern – understandable ones, given China’s huge holdings — about the safety of China’s investment in the US. I would note that buying more foreign goods (i.e. importing more) is an obvious alternative to buying more bonds. And right now the global economy — and the US economy — could use a bit more demand for goods.
Thanks to Arpana Pandey for help on the graphs. Calculated Risk has a set of useful graphs showing the evolution of the nominal trade balance as well.
UPDATE: US exports to China were down 28.6% y/y in January, while US imports from China were down “only” 5.4%. That meant the US deficit with China is actually a bit larger in January 2009 ($20.6b) than in January 2008 ($20.3b) even though the US is importing less from China. The timing of the Chinese new year no doubt pulled the export number down a bit (y/y Chinese imports were way down in January, but they bounced back a bit in February). But the trade data still suggests to me that there was a sharp slowdown in economic activity in China at the end of 2008 that pulled down China’s imports. The US exports some commodities to China — as well as things like scrap iron. Falling commodity prices consequently would have an impact. Some US exports to China are also reexported to the world. But the US also exports capital goods to China, and well, the fall there would reflect a fall in Chinese investment demand. I don’t yet see the basis for arguing that Chinese domestic spending is going to pull the world out of the current slump. Not so long as the world’s exports to China are falling so sharply.
*Edited. I initially reversed the y/y fall in real imports and real exports. The y/y fall in real exports in January exceeded the y/y fall in real imports.
Mr. Setser nice analysis, thanks. S&P 550?
“The sharp fall in US exports adds urgency to the US call for a larger global stimulus.”
I diasagree. What it tells me is that we’re not worth what we’re getting paid. We need to cut wages in the US. In effect, that’s already happened since much of our pay has come from borrowing.
If you make $46,000 a year and you borrow an additional $10,000 a year, you may feel like you have an income of $56,000, but you really don’t.
It’s time to stop fooling ourselves. In the end, we’ll have to stop anyway.
“China’s Premier Wen has expressed concern about the safety of China’s investment in the US. I would note that buying more foreign goods (i.e. importing more) is an obvious alternative to buying more bonds.”
Think China is already starting to buy other USD denominated goods with its treasuries ie gold and oil.
@ K T Cat
You mean, of course, cutting consumption not cutting wages. Overall the U.S. needs to save more which would be the result of cutting consumption. Cutting wages would have the opposite effect. But it would be easier to do if other countries made offsetting adjustments: increasing consumption and reduced savings in surplus countries like Japan, Germany and China.
Instead these three countries are waiting for the U.S. to return to its former consumption level. I predict they will have a long wait.
The increase in the US-China trade deficit is even worse when the labour component is factored in. The amount of labour per $ in US exports is a fraction compared to that of Chinese imports.
The direct labour cost, and therefore content, in commodities is far less than manufactured goods.
Has Japan ever expressed concern about China large holdings of US treasuries and how they might effect the value of their own?
Prime Minister Wen Jiabao angry at US political pressure on China
“On Mar. 13, China’s Premier Wen Jiabao ramped up the rhetoric some more. Wrapping up the annual session of China’s Parliament. Signaling that Beijing has no intention of budging on the issue, Wen spoke out during the morning press conference. “I don’t think the [yuan] is depreciating. Since we reformed the exchange rate in July 2005, the yuan has appreciated 21% against the U.S. dollar,” the Premier said. “No other country can put pressure on our country to depreciate or appreciate the [yuan].”
http://www.businessweek.com/globalbiz/content/mar2009/gb20090313_131621.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis
Rajesh, no I mean cutting wages. If you’re borrowing $2T this year, then that $2T of income into the country is a fantasy. Globalization naturally leads to a reduction in wages in the industrial countries. You just have to deal with that as a fact.
China Finally Diversifying Out of the Dollar
After years of speculation – there are increasing signs that China is diversifying out of the dollar.
For example, the head of China’s energy bureau said in comments published on Monday “China should use part of its nearly $2 trillion in foreign exchange reserves to buy more gold, oil, uranium and other strategic commodities”.
And as China Premier Wen Jiabao was quoted today:
China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves and will safeguard its own interests, Wen said.
“We have adopted a principle of diversification with our foreign-exchange investments,” said Wen. “So far, our holdings are generally safe. China will mainly use the reserves for outbound investments and trade.”
There it is, straight from the horses mouth. China appears to finally be diversifying out of the dollar.
http://www.globalresearch.ca/index.php?context=va&aid=12697
I’m confused by this statement:
“Net exports subtracted from US growth in q4 for the first time in a long time”
But if the US current account deficit went down, doesn’t that by definition add to US growth?
And another point: You are comparing non-oil imports to non-oil exports. Wouldn’t it be reasonable to assume that oil exporters have to make up for their sharply lower revenues by reducing the stuff they import from abroad (some of which comes from the US)? In other words, some of the drop in non-oil exports might be directly or indirectly linked to the drop in oil imports.
But wasn’t January a long time ago?
The Chinese reflationary package only got up steam in mid-February as yesterdays industrial output, bank lending and imports figures show.
Imports of machinery have surged as a result, alongside a rise in other raw materials.
This should lead to a recovery in world trade – not necessarily back to the levels of the peak – but nonetheless up from the December/January lows sooner rather than later.
As the raw materials producers spooked by the collapse in the prices of their commodities, obviously put investment on hold until a bottom was established for raw materials prices. That has now been established, so now they know what they have to work with and I’m guessing its probably not as bad as they might have thought. $45 a barrell for oil is certainly higher than Roubini expected for one.
As China gets its fixed asset investment splurge under way so a recovery in trade will follow.
Final point, the slashing of the balance of payments deficit also explains the recovery of US retail sales yesterday, as it easily outweighs the ongoing falls in employment, in terms of its impact of aggregate demand.
DJC,
China is talking, but there’s no one there to listen. The economy is job #3 with this administration. It’s a distant third behind global warming and income redistribution. I think a lot of people all over the world are coming to this same, sickening conclusion right about now.
By the way, does the US publish monthly import/export data broken down by countries, or only the overall figures? It would be interesting to separately analyze bilateral trade with China, Japan, UK and Euroland.
Sorry, ignore my last post – I didn’t read the release properly. It’s in there.
Thomas –
The nominal current account deficit fell because of the fall in oil prices.
the real deficit didn’t fall tho — as real exports (exports after adjusting for price changes) fell by more than real imports.
thomas — for q4, the q/q fall in real goods exports was 10.3%; the q/q fall in real goods imports was 8.6% (those are huge falls by the way). the trade balance only improved b/c of the fall in oil prices.
Isn’t the January number outdated already? China’s Feb surplus number is only $4 billion, which had to reflect in U.S. Feb trade data. It is March already. The outlook just changed to a new horizon I am afraid.
i do confirm reports China is looking for variables of investment.
i am not sure diversification has happened to date. decisions on Wen will likely come bold/swift summer 2009.
this decision will certainly have impact on traditional u.s. standard of living.
fatbrick, china’s surplus always falls for seasonal reasons in q1. jan/feb 09 still shows a bigger surplus than jan/ feb 08 (and the y/y fall in exports for those 2ms still lags the y/y fall in imports). obviously jan and feb tell different stories, but i am leery of putting all the weight on the feb. data point.
in any case, i suspect that the same forces that are dragging down us exports are also dragging down china’s exports — and since China’s feb exports were way down, my guess is that Feb US exports are also way down. I don’t see a break in the trend vis a vis the US in China’s feb data …
The sharp fall in US exports — and the end of the improvement in the US “real” trade balance — adds urgency to the US call for a larger global stimulus.
I don’t understand.
I think it’s the job of country with commercial excedent to make a stimulus.
Because the american industry is too weak, if you make a stimulus, you stimulate Germany, China, Japan.
Getting back to the oil / non-oil distinction:
Apparently, the deficit with OPEC has decreased only modestly, in spite of a much lower oil bill. This would indicate that OPEC has reacted to the shortfall in oil earnings by ordering a lot less American stuff.
If I interpret the data correctly, you could argue that the trade balance with China has remained unchanged, the non-oil balance with non-oil-exporting countries (i.e. Europe and Japan) has improved markedly, and the non-oil balance with oil-exporting countries has deteriorated, which can be explained by their lack of oil income.
So it seems to me that the only “bad” bit is the fact that the bilateral deficit with China hasn’t come down. The rest of the data seems to point solidly in the right direction.
JLS — I think we are saying the same thing. I want the surplus (countries with a commercial excedent — i assume you are a francophone) countries to do more to stimulate their own and thus the global economy. A bigger global stimulus means the the rest of the world does more …
some people are suggesting China has been pumping a few $$$ into the countries H and perhaps A-shares….
Chinese equities are up YTD…China will need pump more $$$ into some domestic corps to increase employment=increase wages and eventually increase the consumption model.
afterward allow appreciate of the RMB, but this make take some time.
btw…i do believe Bernanke hinted at a remote possibility of hard landing on the dollar at the Council? “remote” that is…
Brad?
If China’s overall surplus is “only” 4B, who is funding US deficit (on a net basis)? I.e. who is running a large overall surplus these days?
Or is it just data issue with Chinese Feb data?
I have also heard the CIA is looking at ‘economic warfare,’ being foolishly (in my view) worried about the notion that China may choose to trash the dollar. Their own economy would probably be the main casualty of such an attempt. I welcome China’s attempt to diversify out of dollar assets. but I don’t think other potential recipients would put up with it. A move into yen would very likely brng a sharp rebuke from Japan, and a move into euro might lead to protectionist actions.
Thanks for the informative post. A hope was that the U.S. economy would gain from starting this episode with such a large deficit, as trade had more room to help its growth than countries starting this episode with large surpluses.
HZ — don’t compare China’s not-seasonally adjusted data for feb with the united states seasonally adjusted data (which isn’t yet out for feb). Seasonal adjustments play havoc on the feb data (short month, chinese new year, lots of seasonality in trade due to end of year holidays in us and europe). in general, the surplus that offsets the us deficit has to be found in east asia or europe. and my guess is that most of it is found in east asia/ china ….
though we won’t know for a while.
do remember tho that china’s surplus was at a record level in jan, and if china is running a smaller surplus in feb, by implicaiton someelse has to run a smaller deficit.
but i would go back to my first point. the monthly data is dangerous. there are months in the tic data where the us cannot finance its deficit based on the observed inflows and months were it is overfinanced. it tends to even out. and feb is one of those months were the seasonal adjustment tends to account for a lot of the deficit, given that seasonal patterns push down the us deficit/ asian surplus in feb/ the month is short.
Fair point, there is usually a smaller Chinese surplus in February, but lets think a minute.
The consensus is that consumption is stagnant or falling in the US, EU etc. while China has just launched a tremendous reflationary package based on state sponsored FAI.
So which way is the trend likely going?
bill j — there is a plausible story that china’s state investment will absorb china’s domestic savings. i would have more confidence though if the share of the stimulus coming directly from the gov’s budget was more than $175b (@ 4% of GDP over two years)/ if the peak to trough swing in the central gov’s budget deficit was gonna be as big as the swing in the US (right now it is expected to be in the 4% of GDP range in China, and far larger in the US.
a lot is hinging on “unleashing” the provinces. and a lot depends on what happens to private investment and private savings. my guess is that private investment is no longer growing/ perhaps falling, and private saving is rising — so there are forces pushing the surplus up as well.
one caveat — my argument that private savings is rising isn’t supported by the retail sales data; it is based more on a sense of how economies respond to shocks/ the fall in china’s imports as a signal of a slowdown.
You’re obviously right that private investment is falling. In fact its slumped according to Goldman Sachs at least.
The question is will it be offset by state saving, the jury’s still out in my opinion, but maybe. Is this enough to drag the US up? Not alone but with a recovery of the commodity suppliers maybe.
K C Cat,
Rather than blame declining US competitiveness on the greatest poverty eradicator the world has ever seen (globalization), how about having a look at the flip side: US relative productivity? Might not the fact that Americans are being asked to live within our means be a reflection of our inability to maintain sufficient productivity for the wages we demand? We can’t keep charging the same price for a shoddy product once someone else makes a better one.
= = = = =
Thomas,
Trade by country: http://www.census.gov/foreign-trade/Press-Release/current_press_release/exh6s.pdf
= = = = =
China’s January trade surplus was the highest since . . . December 2008. Certainly a very long way from being a “record.” The nature of China’s data doesn’t support comparing this January to past Januarys.
The key take-aways on Chinese trade data this year are these:
1. For the first time in the experience of any Chinese leader or policy adviser, trade is contracting very sharply at a time when trade matters.
2. Exports fell for the first time since 1999, and at an unprecedented 21.1% pace in the first two months.
3. Imports did even worse, falling 33.8%, and for the first time since 1998.
4. The trade balance grew 55.8%, about 1/4 as fast as in the first two months of 2007.
DJC” “There it is, straight from the horses mouth. China appears to finally be diversifying out of the dollar.”
Amen!